Summit Ascent Holdings (HKG:102) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Summit Ascent Holdings Limited (HKG:102) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Summit Ascent Holdings

How Much Debt Does Summit Ascent Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Summit Ascent Holdings had HK$119.6m of debt in June 2023, down from HK$171.3m, one year before. But it also has HK$762.3m in cash to offset that, meaning it has HK$642.8m net cash.

How Healthy Is Summit Ascent Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Summit Ascent Holdings had liabilities of HK$44.6m due within 12 months and liabilities of HK$132.5m due beyond that. Offsetting this, it had HK$762.3m in cash and HK$141.3m in receivables that were due within 12 months. So it can boast HK$726.5m more liquid assets than total liabilities.

This surplus liquidity suggests that Summit Ascent Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Summit Ascent Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Summit Ascent Holdings made a loss at the EBIT level, last year, it was also good to see that it generated HK$44m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Summit Ascent Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Summit Ascent Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Summit Ascent Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Summit Ascent Holdings has HK$642.8m in net cash and a strong balance sheet. And it impressed us with free cash flow of HK$58m, being 131% of its EBIT. So is Summit Ascent Holdings's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Summit Ascent Holdings (1 can't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.