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 note that ASMPT Limited (HKG:522) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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
How Much Debt Does ASMPT Carry?
The image below, which you can click on for greater detail, shows that ASMPT had debt of HK$3.76b at the end of December 2022, a reduction from HK$4.26b over a year. However, it does have HK$4.41b in cash offsetting this, leading to net cash of HK$651.2m.
A Look At ASMPT's Liabilities
Zooming in on the latest balance sheet data, we can see that ASMPT had liabilities of HK$5.25b due within 12 months and liabilities of HK$3.67b due beyond that. Offsetting this, it had HK$4.41b in cash and HK$4.60b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.
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$30.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, ASMPT boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact ASMPT's saving grace is its low debt levels, because its EBIT has tanked 40% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ASMPT can strengthen its balance sheet over time. 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. While ASMPT has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, ASMPT recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that ASMPT has net cash of HK$651.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of HK$2.4b, being 76% of its EBIT. So we don't have any problem with ASMPT's use of debt. 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 1 warning sign with ASMPT , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.