Is Asia Commercial Holdings (HKG:104) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Asia Commercial Holdings Limited (HKG:104) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Asia Commercial Holdings

How Much Debt Does Asia Commercial Holdings Carry?

As you can see below, Asia Commercial Holdings had HK$174.4m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have HK$194.5m in cash offsetting this, leading to net cash of HK$20.1m.

How Strong Is Asia Commercial Holdings' Balance Sheet?

We can see from the most recent balance sheet that Asia Commercial Holdings had liabilities of HK$296.6m falling due within a year, and liabilities of HK$63.7m due beyond that. On the other hand, it had cash of HK$194.5m and HK$65.7m worth of receivables due within a year. So its liabilities total HK$100.1m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Asia Commercial Holdings is worth HK$194.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Asia Commercial Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Asia Commercial Holdings grew its EBIT at 14% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Asia Commercial 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Asia Commercial 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. Happily for any shareholders, Asia Commercial Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Asia Commercial Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of HK$20.1m. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in HK$84m. So we don't think Asia Commercial Holdings's use of debt is risky. 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. For instance, we've identified 4 warning signs for Asia Commercial Holdings that 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.