Is Asia Standard Hotel Group (HKG:292) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Asia Standard Hotel Group Limited (HKG:292) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Asia Standard Hotel Group

What Is Asia Standard Hotel Group's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Asia Standard Hotel Group had debt of HK$6.95b, up from HK$6.48b in one year. But on the other hand it also has HK$7.34b in cash, leading to a HK$390.3m net cash position.

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$3.38b due within a year, and liabilities of HK$4.01b falling due after that. Offsetting this, it had HK$7.34b in cash and HK$285.3m in receivables that were due within 12 months. So it actually has HK$236.4m more liquid assets than total liabilities.

This surplus strongly suggests that Asia Standard Hotel Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Asia Standard Hotel Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly Asia Standard Hotel Group's EBIT was essentially flat over the last twelve months. We would prefer to see some earnings growth, because that always helps diminish debt. There's no doubt that we learn most about debt from the balance sheet. But it is Asia Standard Hotel Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Asia Standard Hotel Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Asia Standard Hotel Group saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Asia Standard Hotel Group has net cash of HK$390.3m, as well as more liquid assets than liabilities. So we don't have any problem with Asia Standard Hotel Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Asia Standard Hotel Group (of which 1 is significant!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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