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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, A-Smart Holdings Ltd. (SGX:BQC) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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. 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.

View our latest analysis for A-Smart Holdings

What Is A-Smart Holdings's Debt?

As you can see below, at the end of January 2025, A-Smart Holdings had S$4.97m of debt, up from S$3.33m a year ago. Click the image for more detail. However, its balance sheet shows it holds S$5.01m in cash, so it actually has S$43.0k net cash.

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How Strong Is A-Smart Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that A-Smart Holdings had liabilities of S$6.87m due within 12 months and liabilities of S$1.92m due beyond that. Offsetting these obligations, it had cash of S$5.01m as well as receivables valued at S$4.02m due within 12 months. So it actually has S$250.0k more liquid assets than total liabilities.

This state of affairs indicates that A-Smart Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the S$23.6m company is short on cash, but still worth keeping an eye on the balance sheet. 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. There's no doubt that we learn most about debt from the balance sheet. But it is A-Smart Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year A-Smart Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to S$7.9m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is A-Smart Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that A-Smart Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of S$6.2m and booked a S$619k accounting loss. Given it only has net cash of S$43.0k, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for A-Smart Holdings (of which 1 is a bit unpleasant!) you should know about.

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.