Is ASL Marine Holdings (SGX:A04) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 ASL Marine Holdings Ltd. (SGX:A04) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for ASL Marine Holdings

What Is ASL Marine Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that ASL Marine Holdings had debt of S$334.2m at the end of March 2021, a reduction from S$372.6m over a year. On the flip side, it has S$23.9m in cash leading to net debt of about S$310.4m.

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$192.8m falling due within a year, and liabilities of S$323.2m due beyond that. Offsetting these obligations, it had cash of S$23.9m as well as receivables valued at S$73.1m due within 12 months. So its liabilities total S$419.0m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the S$30.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, ASL Marine Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year ASL Marine Holdings had a loss before interest and tax, and actually shrunk its revenue by 28%, to S$190m. To be frank that doesn't bode well.

Caveat Emptor

Not only did ASL Marine Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable S$25m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost S$42m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for ASL Marine Holdings (of which 1 is a bit concerning!) you should know about.

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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