Does APM Automotive Holdings Berhad (KLSE:APM) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 APM Automotive Holdings Berhad (KLSE:APM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for APM Automotive Holdings Berhad

What Is APM Automotive Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 APM Automotive Holdings Berhad had debt of RM87.6m, up from RM71.7m in one year. However, it does have RM410.1m in cash offsetting this, leading to net cash of RM322.5m.

A Look At APM Automotive Holdings Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that APM Automotive Holdings Berhad had liabilities of RM355.0m due within 12 months and liabilities of RM108.7m due beyond that. On the other hand, it had cash of RM410.1m and RM271.5m worth of receivables due within a year. So it actually has RM217.9m 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. Having regard to this fact, we think its balance sheet is as strong as an ox. 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 74% 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since APM Automotive Holdings Berhad will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While APM Automotive Holdings Berhad 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 last three years, APM Automotive Holdings Berhad actually produced more free cash flow than EBIT. 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 RM322.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM88m, being 104% of its EBIT. So is APM Automotive Holdings Berhad's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for APM Automotive Holdings Berhad you should be aware of, and 1 of them makes us a bit uncomfortable.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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