Health Check: How Prudently Does Link-Asia International (HKG:1143) Use Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Link-Asia International Co. Ltd. (HKG:1143) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Link-Asia International

What Is Link-Asia International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Link-Asia International had HK$17.7m of debt in June 2020, down from HK$40.2m, one year before. However, its balance sheet shows it holds HK$212.5m in cash, so it actually has HK$194.8m net cash.

How Healthy Is Link-Asia International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Link-Asia International had liabilities of HK$293.8m due within 12 months and liabilities of HK$21.1m due beyond that. Offsetting this, it had HK$212.5m in cash and HK$184.3m in receivables that were due within 12 months. So it actually has HK$81.8m more liquid assets than total liabilities.

This surplus liquidity suggests that Link-Asia International's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Link-Asia International boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Link-Asia International will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Link-Asia International had a loss before interest and tax, and actually shrunk its revenue by 7.6%, to HK$597m. We would much prefer see growth.

So How Risky Is Link-Asia International?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Link-Asia International had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$105m and booked a HK$167m accounting loss. But the saving grace is the HK$194.8m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Link-Asia International has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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