Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies ASTI Holdings Limited (SGX:575) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.
How Much Debt Does ASTI Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 ASTI Holdings had S$5.84m of debt, an increase on S$4.69m, over one year. However, it does have S$28.9m in cash offsetting this, leading to net cash of S$23.1m.
A Look At ASTI Holdings' Liabilities
Zooming in on the latest balance sheet data, we can see that ASTI Holdings had liabilities of S$23.1m due within 12 months and liabilities of S$4.11m due beyond that. On the other hand, it had cash of S$28.9m and S$23.1m worth of receivables due within a year. So it actually has S$24.8m more liquid assets than total liabilities.
This surplus liquidity suggests that ASTI Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that ASTI Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ASTI 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.
In the last year ASTI Holdings had a loss before interest and tax, and actually shrunk its revenue by 13%, to S$57m. That's not what we would hope to see.
So How Risky Is ASTI Holdings?
Although ASTI Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of S$2.1m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. There's no doubt the next few years will be crucial to how the business matures. 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. We've identified 3 warning signs with ASTI Holdings , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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