Aspen (Group) Holdings (SGX:1F3) Has A Somewhat Strained Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Aspen (Group) Holdings Limited (SGX:1F3) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Aspen (Group) Holdings

What Is Aspen (Group) Holdings's Net Debt?

As you can see below, Aspen (Group) Holdings had RM404.3m of debt at June 2021, down from RM426.3m a year prior. However, it also had RM68.1m in cash, and so its net debt is RM336.2m.

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

The latest balance sheet data shows that Aspen (Group) Holdings had liabilities of RM620.9m due within a year, and liabilities of RM441.0m falling due after that. Offsetting these obligations, it had cash of RM68.1m as well as receivables valued at RM95.8m due within 12 months. So it has liabilities totalling RM897.9m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM400.9m 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.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

As it happens Aspen (Group) Holdings has a fairly concerning net debt to EBITDA ratio of 9.5 but very strong interest coverage of 36.2. This means that unless the company has access to very cheap debt, that interest expense will likely grow in the future. Pleasingly, Aspen (Group) Holdings is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 297% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Aspen (Group) 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Aspen (Group) Holdings burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

On the face of it, Aspen (Group) Holdings's conversion of EBIT to free cash flow left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. Overall, it seems to us that Aspen (Group) Holdings's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. For example, we've discovered 4 warning signs for Aspen (Group) Holdings that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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