Does Ajiya Berhad (KLSE:AJIYA) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Ajiya Berhad (KLSE:AJIYA) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Ajiya Berhad

How Much Debt Does Ajiya Berhad Carry?

The image below, which you can click on for greater detail, shows that at November 2022 Ajiya Berhad had debt of RM12.1m, up from RM834.0k in one year. But it also has RM173.8m in cash to offset that, meaning it has RM161.7m net cash.

A Look At Ajiya Berhad's Liabilities

According to the last reported balance sheet, Ajiya Berhad had liabilities of RM50.7m due within 12 months, and liabilities of RM7.51m due beyond 12 months. Offsetting this, it had RM173.8m in cash and RM83.5m in receivables that were due within 12 months. So it actually has RM199.1m more liquid assets than total liabilities.

This luscious liquidity implies that Ajiya 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, Ajiya Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Ajiya Berhad grew its EBIT by 81% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ajiya 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Ajiya 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. During the last two years, Ajiya Berhad produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ajiya Berhad has net cash of RM161.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 81% over the last year. The bottom line is that we do not find Ajiya Berhad's debt levels at all concerning. Over time, share prices tend to follow earnings per share, so if you're interested in Ajiya Berhad, you may well want to click here to check an interactive graph of its earnings per share history.

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.