Is Aspen (Group) Holdings (SGX:1F3) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Aspen (Group) Holdings Limited (SGX:1F3) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Aspen (Group) Holdings

How Much Debt Does Aspen (Group) Holdings Carry?

The chart below, which you can click on for greater detail, shows that Aspen (Group) Holdings had RM403.7m in debt in June 2022; about the same as the year before. However, it also had RM31.8m in cash, and so its net debt is RM371.9m.

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

We can see from the most recent balance sheet that Aspen (Group) Holdings had liabilities of RM698.2m falling due within a year, and liabilities of RM368.8m due beyond that. On the other hand, it had cash of RM31.8m and RM152.5m worth of receivables due within a year. So its liabilities total RM882.8m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM157.0m 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Aspen (Group) Holdings's earnings that will influence how the balance sheet holds up in the future. 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, Aspen (Group) Holdings made a loss at the EBIT level, and saw its revenue drop to RM253m, which is a fall of 15%. We would much prefer see growth.

Caveat Emptor

While Aspen (Group) Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping RM81m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of RM87m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. For instance, we've identified 4 warning signs for Aspen (Group) Holdings (2 are a bit unpleasant) you should be aware of.

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.