Is Asia Standard Hotel Group (HKG:292) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Asia Standard Hotel Group Limited (HKG:292) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Asia Standard Hotel Group

How Much Debt Does Asia Standard Hotel Group Carry?

The image below, which you can click on for greater detail, shows that Asia Standard Hotel Group had debt of HK$5.85b at the end of March 2023, a reduction from HK$6.50b over a year. However, because it has a cash reserve of HK$2.51b, its net debt is less, at about HK$3.34b.

How Healthy Is Asia Standard Hotel Group's Balance Sheet?

The latest balance sheet data shows that Asia Standard Hotel Group had liabilities of HK$1.59b due within a year, and liabilities of HK$4.68b falling due after that. On the other hand, it had cash of HK$2.51b and HK$478.8m worth of receivables due within a year. So it has liabilities totalling HK$3.29b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$195.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Asia Standard Hotel Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Asia Standard Hotel Group'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.

Over 12 months, Asia Standard Hotel Group made a loss at the EBIT level, and saw its revenue drop to HK$927m, which is a fall of 6.4%. That's not what we would hope to see.

Caveat Emptor

Importantly, Asia Standard Hotel Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$66m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$213m in the last year. So we're not very excited about owning this stock. Its too risky for 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Asia Standard Hotel Group (of which 2 are significant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.