We Think APM Automotive Holdings Berhad (KLSE:APM) Can Manage Its Debt With Ease

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, APM Automotive Holdings Berhad (KLSE:APM) does carry debt. But the real question is whether this debt is making the company risky.

Our free stock report includes 1 warning sign investors should be aware of before investing in APM Automotive Holdings Berhad. Read for free now.

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

What Is APM Automotive Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 APM Automotive Holdings Berhad had debt of RM339.9m, up from RM118.8m in one year. However, its balance sheet shows it holds RM640.0m in cash, so it actually has RM300.1m net cash.

How Strong Is APM Automotive Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that APM Automotive Holdings Berhad had liabilities of RM562.1m falling due within a year, and liabilities of RM335.8m due beyond that. Offsetting these obligations, it had cash of RM640.0m as well as receivables valued at RM411.1m due within 12 months. So it actually has RM153.1m more liquid assets than total liabilities.

This surplus suggests that APM Automotive Holdings Berhad is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, APM Automotive Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for APM Automotive Holdings Berhad

In addition to that, we're happy to report that APM Automotive Holdings Berhad has boosted its EBIT by 61%, thus reducing the spectre of future debt repayments. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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 recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case APM Automotive Holdings Berhad has RM300.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in -RM3.6m. The bottom line is that we do not find APM Automotive Holdings Berhad's debt levels at all concerning. 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. Be aware that APM Automotive Holdings Berhad is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.