We Think ASMPT (HKG:522) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, ASMPT Limited (HKG:522) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ASMPT

How Much Debt Does ASMPT Carry?

You can click the graphic below for the historical numbers, but it shows that ASMPT had HK$2.00b of debt in June 2023, down from HK$3.05b, one year before. However, it does have HK$3.76b in cash offsetting this, leading to net cash of HK$1.76b.

A Look At ASMPT's Liabilities

We can see from the most recent balance sheet that ASMPT had liabilities of HK$6.20b falling due within a year, and liabilities of HK$1.66b due beyond that. On the other hand, it had cash of HK$3.76b and HK$4.58b worth of receivables due within a year. So it can boast HK$478.1m more liquid assets than total liabilities.

Having regard to ASMPT's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the HK$28.9b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, ASMPT boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact ASMPT's saving grace is its low debt levels, because its EBIT has tanked 53% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ASMPT's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that ASMPT has net cash of HK$1.76b, as well as more liquid assets than liabilities. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in HK$1.9b. So we are not troubled with ASMPT's debt use. 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. For example - ASMPT has 2 warning signs we think 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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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.