Stock Analysis

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

SGX:A04
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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies ASL Marine Holdings Ltd. (SGX:A04) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ASL Marine Holdings

What Is ASL Marine Holdings's Net Debt?

As you can see below, ASL Marine Holdings had S$320.3m of debt at December 2021, down from S$342.5m a year prior. However, it does have S$23.8m in cash offsetting this, leading to net debt of about S$296.6m.

debt-equity-history-analysis
SGX:A04 Debt to Equity History April 19th 2022

How Strong Is ASL Marine Holdings' Balance Sheet?

According to the last reported balance sheet, ASL Marine Holdings had liabilities of S$223.3m due within 12 months, and liabilities of S$303.0m due beyond 12 months. Offsetting this, it had S$23.8m in cash and S$88.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$413.6m.

The deficiency here weighs heavily on the S$32.8m 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 4.8%, to S$215m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, ASL Marine Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping S$16m. 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$27m 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. To that end, you should be aware of the 2 warning signs we've spotted with ASL Marine Holdings .

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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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

About SGX:A04

ASL Marine Holdings

Provides marine services in Singapore, Indonesia, Asia Pacific, South Asia, Europe, the Middle East, and Australia.

Moderate and slightly overvalued.

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