We Think ASMPT (HKG:522) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, ASMPT Limited (HKG:522) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Our analysis indicates that 522 is potentially undervalued!

How Much Debt Does ASMPT Carry?

As you can see below, ASMPT had HK$4.61b of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has HK$4.75b in cash to offset that, meaning it has HK$139.5m net cash.

A Look At ASMPT's Liabilities

According to the last reported balance sheet, ASMPT had liabilities of HK$6.86b due within 12 months, and liabilities of HK$3.89b due beyond 12 months. Offsetting these obligations, it had cash of HK$4.75b as well as receivables valued at HK$5.62b due within 12 months. So its liabilities total HK$383.1m more than the combination of its cash and short-term receivables.

Having regard to ASMPT's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the HK$22.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, ASMPT also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that ASMPT grew its EBIT by 16% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ASMPT can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ASMPT 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. Over the most recent three years, ASMPT recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that ASMPT has HK$139.5m in net cash. And it impressed us with free cash flow of HK$2.7b, being 79% of its EBIT. So is ASMPT's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that ASMPT is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.