Stock Analysis

Is ASMPT (HKG:522) A Risky Investment?

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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies ASMPT Limited (HKG:522) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

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What Is ASMPT's Net Debt?

You can click the graphic below for the historical numbers, but it shows that ASMPT had HK$2.25b of debt in December 2022, down from HK$2.72b, one year before. However, it does have HK$4.41b in cash offsetting this, leading to net cash of HK$2.16b.

SEHK:522 Debt to Equity History March 15th 2023

How Healthy Is ASMPT's Balance Sheet?

The latest balance sheet data shows that ASMPT had liabilities of HK$5.25b due within a year, and liabilities of HK$3.67b falling due after that. On the other hand, it had cash of HK$4.41b and HK$4.60b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that ASMPT's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the HK$29.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that ASMPT has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact ASMPT's saving grace is its low debt levels, because its EBIT has tanked 22% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ASMPT can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While ASMPT 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. During the last three years, ASMPT generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case ASMPT has HK$2.16b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of HK$2.7b, being 83% of its EBIT. So we don't have any problem with ASMPT's use of debt. 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. Case in point: We've spotted 1 warning sign for ASMPT you should be aware of.

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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