Would Asahi Songwon Colors (NSE:ASAHISONG) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Asahi Songwon Colors Limited (NSE:ASAHISONG) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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 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 Asahi Songwon Colors

What Is Asahi Songwon Colors's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Asahi Songwon Colors had ₹1.24b of debt, an increase on ₹874.6m, over one year. However, because it has a cash reserve of ₹88.7m, its net debt is less, at about ₹1.15b.

How Healthy Is Asahi Songwon Colors' Balance Sheet?

We can see from the most recent balance sheet that Asahi Songwon Colors had liabilities of ₹2.11b falling due within a year, and liabilities of ₹757.7m due beyond that. Offsetting these obligations, it had cash of ₹88.7m as well as receivables valued at ₹1.13b due within 12 months. So it has liabilities totalling ₹1.65b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Asahi Songwon Colors is worth ₹2.75b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Asahi Songwon Colors's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Asahi Songwon Colors wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to ₹5.1b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Asahi Songwon Colors still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹37m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹15m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Asahi Songwon Colors (of which 1 shouldn't be ignored!) you should know about.

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.