We Think Asia-express Logistics Holdings (HKG:8620) Has A Fair Chunk Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Asia-express Logistics Holdings Limited (HKG:8620) does use debt in its business. But is this debt a concern to shareholders?

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. 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, 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.

See our latest analysis for Asia-express Logistics Holdings

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

As you can see below, at the end of March 2022, Asia-express Logistics Holdings had HK$50.5m of debt, up from HK$34.0m a year ago. Click the image for more detail. On the flip side, it has HK$25.8m in cash leading to net debt of about HK$24.7m.

How Healthy 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$103.8m due within 12 months and liabilities of HK$20.0m due beyond that. Offsetting these obligations, it had cash of HK$25.8m as well as receivables valued at HK$55.9m due within 12 months. So its liabilities total HK$42.2m more than the combination of its cash and short-term receivables.

Asia-express Logistics Holdings has a market capitalization of HK$84.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. 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 9.1%, to HK$413m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Asia-express Logistics Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping HK$16m. 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$18m. In the meantime, we consider the stock very risky. 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. We've identified 3 warning signs with Asia-express Logistics Holdings (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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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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.