Is ASL Marine Holdings (SGX:A04) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that ASL Marine Holdings Ltd. (SGX:A04) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ASL Marine Holdings

How Much Debt Does ASL Marine Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that ASL Marine Holdings had S$313.3m of debt in March 2022, down from S$334.2m, one year before. However, it also had S$29.2m in cash, and so its net debt is S$284.0m.

How Strong Is ASL Marine Holdings' Balance Sheet?

We can see from the most recent balance sheet that ASL Marine Holdings had liabilities of S$221.8m falling due within a year, and liabilities of S$295.3m due beyond that. Offsetting these obligations, it had cash of S$29.2m as well as receivables valued at S$75.2m due within 12 months. So it has liabilities totalling S$412.7m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the S$35.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, ASL Marine Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ASL Marine 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.

Over 12 months, ASL Marine Holdings reported revenue of S$223m, which is a gain of 17%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, ASL Marine Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable S$14m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost S$29m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. For example, we've discovered 2 warning signs for ASL Marine Holdings (1 is potentially serious!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.