Asia-express Logistics Holdings (HKG:8620) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Asia-express Logistics Holdings Limited (HKG:8620) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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.

Check out our latest analysis for Asia-express Logistics Holdings

What Is Asia-express Logistics Holdings's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Asia-express Logistics Holdings had debt of HK$80.3m, up from HK$34.0m in one year. However, because it has a cash reserve of HK$33.4m, its net debt is less, at about HK$46.8m.

How Strong Is Asia-express Logistics Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Asia-express Logistics Holdings had liabilities of HK$114.6m due within 12 months and liabilities of HK$20.0m due beyond that. On the other hand, it had cash of HK$33.4m and HK$78.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$22.6m.

While this might seem like a lot, it is not so bad since Asia-express Logistics Holdings has a market capitalization of HK$97.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Asia-express Logistics Holdings 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-express Logistics Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to HK$428m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Asia-express Logistics Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$1.1m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of HK$7.2m. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Asia-express Logistics Holdings has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.