We Think Asia-express Logistics Holdings (HKG:8620) Has A Fair Chunk Of 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.' 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. We can see that Asia-express Logistics Holdings Limited (HKG:8620) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Asia-express Logistics Holdings

How Much Debt Does Asia-express Logistics Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Asia-express Logistics Holdings had HK$27.0m of debt in September 2020, down from HK$30.0m, one year before. However, because it has a cash reserve of HK$26.0m, its net debt is less, at about HK$1.03m.

A Look At Asia-express Logistics Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Asia-express Logistics Holdings had liabilities of HK$77.0m due within 12 months and liabilities of HK$18.3m due beyond that. Offsetting this, it had HK$26.0m in cash and HK$66.7m in receivables that were due within 12 months. So it has liabilities totalling HK$2.63m more than its cash and near-term receivables, combined.

Of course, Asia-express Logistics Holdings has a market capitalization of HK$82.6m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Asia-express Logistics Holdings has virtually no net debt, 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-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 wasn't profitable at an EBIT level, but managed to grow its revenue by 7.3%, to HK$357m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Asia-express Logistics Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$3.7m 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. However, it doesn't help that it burned through HK$17m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Asia-express Logistics Holdings (including 1 which is significant) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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