Is Aspen (Group) Holdings (SGX:1F3) Weighed On By Its Debt Load?

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.' 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 can see that Aspen (Group) Holdings Limited (SGX:1F3) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Aspen (Group) Holdings

What Is Aspen (Group) Holdings's Debt?

As you can see below, Aspen (Group) Holdings had RM221.6m of debt at June 2023, down from RM361.0m a year prior. On the flip side, it has RM29.0m in cash leading to net debt of about RM192.7m.

How Healthy Is Aspen (Group) Holdings' Balance Sheet?

The latest balance sheet data shows that Aspen (Group) Holdings had liabilities of RM565.6m due within a year, and liabilities of RM311.1m falling due after that. On the other hand, it had cash of RM29.0m and RM132.3m worth of receivables due within a year. So its liabilities total RM715.4m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM92.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Aspen (Group) Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Aspen (Group) 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, Aspen (Group) Holdings reported revenue of RM270m, which is a gain of 6.7%, 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, Aspen (Group) Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM91m. 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. 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 RM79m 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. For example Aspen (Group) Holdings has 3 warning signs (and 1 which is potentially serious) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.