Is Asia-express Logistics Holdings (HKG:8620) Using Debt In A Risky Way?

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.' 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 Asia-express Logistics Holdings Limited (HKG:8620) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

See our latest analysis for Asia-express Logistics Holdings

What Is Asia-express Logistics Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Asia-express Logistics Holdings had HK$75.9m of debt, an increase on HK$50.5m, over one year. However, it also had HK$12.5m in cash, and so its net debt is HK$63.4m.

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

According to the last reported balance sheet, Asia-express Logistics Holdings had liabilities of HK$96.5m due within 12 months, and liabilities of HK$20.5m due beyond 12 months. Offsetting this, it had HK$12.5m in cash and HK$53.0m in receivables that were due within 12 months. So it has liabilities totalling HK$51.6m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of HK$60.5m, so it does suggest shareholders should keep an eye on Asia-express Logistics Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 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 Asia-express Logistics Holdings had a loss before interest and tax, and actually shrunk its revenue by 22%, to HK$335m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Asia-express Logistics Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$27m. 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. We would feel better if it turned its trailing twelve month loss of HK$29m into a profit. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Asia-express Logistics Holdings you should know about.

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.