Is A-Smart Holdings (SGX:BQC) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies A-Smart Holdings Ltd. (SGX:BQC) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for A-Smart Holdings

What Is A-Smart Holdings's Net Debt?

As you can see below, at the end of July 2023, A-Smart Holdings had S$3.30m of debt, up from S$348.0k a year ago. Click the image for more detail. But on the other hand it also has S$7.85m in cash, leading to a S$4.55m net cash position.

How Healthy Is A-Smart Holdings' Balance Sheet?

The latest balance sheet data shows that A-Smart Holdings had liabilities of S$5.11m due within a year, and liabilities of S$3.00m falling due after that. Offsetting these obligations, it had cash of S$7.85m as well as receivables valued at S$4.10m due within 12 months. So it can boast S$3.84m more liquid assets than total liabilities.

This short term liquidity is a sign that A-Smart Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that A-Smart Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since A-Smart 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, A-Smart Holdings reported revenue of S$6.3m, which is a gain of 3.1%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is A-Smart Holdings?

While A-Smart Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of S$113k. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Be aware that A-Smart Holdings is showing 5 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

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.