Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, ASMPT Limited (HKG:522) does carry debt. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for ASMPT
What Is ASMPT's Debt?
The chart below, which you can click on for greater detail, shows that ASMPT had HK$3.05b in debt in June 2022; about the same as the year before. But on the other hand it also has HK$4.75b in cash, leading to a HK$1.70b net cash position.SEHK:522 Debt to Equity History August 2nd 2022
How Strong Is ASMPT's Balance Sheet ?
Zooming in on the latest balance sheet data, we can see that ASMPT had liabilities of HK$6.86b due within 12 months and liabilities of HK$3.89b due beyond that. Offsetting this, it had HK$4.75b in cash and HK$5.62b in receivables that were due within 12 months. So its liabilities total HK$383.1m more than the combination of its cash and short-term receivables.
Having regard to ASMPT's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the HK$25.3b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, ASMPT also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that ASMPT has boosted its EBIT by 95%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine ASMPT's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. ASMPT may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, ASMPT recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
We could understand if investors are concerned about ASMPT's liabilities, but we can be reassured by the fact it has has net cash of HK$1.70b. And we liked the look of last year's 95% year-on-year EBIT growth. So is ASMPT's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for ASMPT (of which 1 is a bit concerning!) 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.