Is Asia Commercial Holdings (HKG:104) A Risky Investment?

Warren Buffett famously said, '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. We note that Asia Commercial Holdings Limited (HKG:104) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Asia Commercial Holdings

How Much Debt Does Asia Commercial Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Asia Commercial Holdings had HK$172.5m of debt, an increase on HK$164.1m, over one year. However, its balance sheet shows it holds HK$234.6m in cash, so it actually has HK$62.1m net cash.

How Healthy Is Asia Commercial Holdings' Balance Sheet?

According to the last reported balance sheet, Asia Commercial Holdings had liabilities of HK$312.2m due within 12 months, and liabilities of HK$89.2m due beyond 12 months. On the other hand, it had cash of HK$234.6m and HK$45.4m worth of receivables due within a year. So it has liabilities totalling HK$121.4m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of HK$162.9m, so it does suggest shareholders should keep an eye on Asia Commercial Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Asia Commercial Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Asia Commercial Holdings has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Asia Commercial Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Asia Commercial Holdings 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. Happily for any shareholders, Asia Commercial Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Asia Commercial Holdings does have more liabilities than liquid assets, it also has net cash of HK$62.1m. The cherry on top was that in converted 181% of that EBIT to free cash flow, bringing in HK$165m. So we are not troubled with Asia Commercial Holdings's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 5 warning signs for Asia Commercial Holdings (1 is a bit unpleasant!) that you should be aware of before investing here.

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.