Is Asia Energy Logistics Group (HKG:351) Using Too Much Debt?

Warren Buffett famously said, '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. Importantly, Asia Energy Logistics Group Limited (HKG:351) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Asia Energy Logistics Group

What Is Asia Energy Logistics Group's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Asia Energy Logistics Group had debt of HK$31.6m, up from HK$22.2m in one year. However, its balance sheet shows it holds HK$55.5m in cash, so it actually has HK$23.9m net cash.

How Healthy Is Asia Energy Logistics Group's Balance Sheet?

According to the last reported balance sheet, Asia Energy Logistics Group had liabilities of HK$21.0m due within 12 months, and liabilities of HK$35.3m due beyond 12 months. Offsetting this, it had HK$55.5m in cash and HK$5.79m in receivables that were due within 12 months. So it can boast HK$5.00m more liquid assets than total liabilities.

Having regard to Asia Energy Logistics Group'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$559.3m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Asia Energy Logistics Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Asia Energy Logistics Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Asia Energy Logistics Group wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to HK$65m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Asia Energy Logistics Group?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Asia Energy Logistics Group had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$22m of cash and made a loss of HK$53m. With only HK$23.9m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Asia Energy Logistics Group may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Asia Energy Logistics Group that 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.