Too much debt can catch up with companies when tides turn for the worse.
The post Here are 3 ASX shares with high debt levels appeared first on The Motley Fool Australia. –
There are many competing variables at play when considering investing in an ASX share. Whether it has good growth potential, if it has a moat from the competition, or if it’s at a good price.
These are all important factors but another immensely critical factor that even the great Warren Buffett bangs on about is… the balance sheet.
A company with a good balance sheet can weather economic storms. Often, such companies can offer dividends to shareholders. And when challenging times do hit, they have excess cash to even take advantage of the conditions. Sometimes that means acquiring competitors at a discount.
On the flip side, companies with high levels of debt are often caught out when tides turn. So, let’s peruse a handful of ASX shares with high debt levels.
ASX shares that might be dancing with the debtor
Openpay Group Ltd (ASX: OPY)
The first cab off the rank is buy now, pay later player Openpay. This ASX share has the smallest market capitalisation out of the bunch at $169.5 million. Openpay’s marketed differentiator is its flexibility of payment plan. These payment plans range from 2 to 24 months for up to $20,000.
At the end of December, the company held $46.2 million of debt on its balance sheet. However, thanks to a handful of capital raisings, it also held $39.3 million in cash. Based on reported figures, Openpay’s debt-to-equity ratio stood at 91.8% at the end of December.
Typically, a company would aim to maintain a debt-to-equity ratio of less than 40% to ensure it doesn’t get caught with its pants down.
Usually, having a chunk of cash to offset that debt would defuse concerns. However, Openpay remains a loss-making company, burning through its cash reserves.
Flight Centre Travel Group Ltd (ASX: FLT)
Many would know how disappointing ruined travel plans have been — though ASX tourism companies probably know that pain to a different extent. Flight Centre was walloped by COVID-19, with revenue and earnings falling off a cliff.
Unsurprisingly, the damage has extended to the balance sheet. While the company has managed to bolster its cash reserves, debts have skyrocketed. At the end of December 2020, Flight Centre had $914 million in debt, equating to a debt-to-equity ratio of 78.4%.
Unless earnings bounce back, this ASX share could quickly churn through its cash balance, which could potentially result in further capital raisings.
Event Hospitality and Entertainment Ltd (ASX: EVT)
Last on the list – another company hit by the pandemic with a balance sheet that’s worse for wear. Event Hospitality and Entertainment owns various hotels, resorts, and cinemas. All of these have been impacted to some extent.
Consequently, debt levels have crept higher in the past 18 months to $532.5 million. That gives Event a debt-to-equity ratio of 61.8%. Much like Flight Centre, this company has switched from profitable to loss-making.
Event has managed to get by without raising additional capital yet. However, it could potentially find itself in a similar position as Flight Centre if profitability doesn’t resume in the short to medium term.
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Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.