Is Asia Gate Holdings (TYO:1783) A Risky Investment?

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.' 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 note that Asia Gate Holdings Co., Ltd. (TYO:1783) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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, 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 Asia Gate Holdings

What Is Asia Gate Holdings's Debt?

The image below, which you can click on for greater detail, shows that Asia Gate Holdings had debt of JP¥3.03b at the end of December 2020, a reduction from JP¥5.23b over a year. However, it does have JP¥1.40b in cash offsetting this, leading to net debt of about JP¥1.63b.

How Strong Is Asia Gate Holdings' Balance Sheet?

According to the last reported balance sheet, Asia Gate Holdings had liabilities of JP¥1.23b due within 12 months, and liabilities of JP¥3.05b due beyond 12 months. Offsetting these obligations, it had cash of JP¥1.40b as well as receivables valued at JP¥124.0m due within 12 months. So it has liabilities totalling JP¥2.76b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of JP¥2.99b, so it does suggest shareholders should keep an eye on Asia Gate Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Asia Gate 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.

Over 12 months, Asia Gate Holdings reported revenue of JP¥4.8b, which is a gain of 49%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Asia Gate Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable JP¥586m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through JP¥468m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Asia Gate Holdings you should be aware of, and 1 of them makes us a bit uncomfortable.

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. 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.
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