APM Automotive Holdings Berhad (KLSE:APM) Has A Rock Solid Balance Sheet

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.' 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. We can see that APM Automotive Holdings Berhad (KLSE:APM) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for APM Automotive Holdings Berhad

How Much Debt Does APM Automotive Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 APM Automotive Holdings Berhad had RM86.2m of debt, an increase on RM69.4m, over one year. But it also has RM380.0m in cash to offset that, meaning it has RM293.8m net cash.

A Look At APM Automotive Holdings Berhad's Liabilities

According to the last reported balance sheet, APM Automotive Holdings Berhad had liabilities of RM301.8m due within 12 months, and liabilities of RM90.0m due beyond 12 months. On the other hand, it had cash of RM380.0m and RM266.3m worth of receivables due within a year. So it can boast RM254.5m more liquid assets than total liabilities.

This luscious liquidity implies that APM Automotive Holdings Berhad's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, APM Automotive Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact APM Automotive Holdings Berhad's saving grace is its low debt levels, because its EBIT has tanked 77% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is APM Automotive Holdings Berhad'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. APM Automotive Holdings Berhad 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. Happily for any shareholders, APM Automotive Holdings Berhad actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that APM Automotive Holdings Berhad has net cash of RM293.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in RM84m. So we don't think APM Automotive Holdings Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - APM Automotive Holdings Berhad has 2 warning signs (and 1 which doesn't sit too well with us) we think 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. 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.
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