Stock Analysis

Is AT Systematization Berhad (KLSE:AT) A Risky Investment?

KLSE:AT
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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that AT Systematization Berhad (KLSE:AT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for AT Systematization Berhad

What Is AT Systematization Berhad's Net Debt?

As you can see below, AT Systematization Berhad had RM9.67m of debt at September 2020, down from RM11.4m a year prior. However, its balance sheet shows it holds RM19.9m in cash, so it actually has RM10.3m net cash.

debt-equity-history-analysis
KLSE:AT Debt to Equity History December 1st 2020

A Look At AT Systematization Berhad's Liabilities

According to the last reported balance sheet, AT Systematization Berhad had liabilities of RM8.54m due within 12 months, and liabilities of RM12.0m due beyond 12 months. Offsetting these obligations, it had cash of RM19.9m as well as receivables valued at RM30.3m due within 12 months. So it actually has RM29.7m more liquid assets than total liabilities.

This surplus suggests that AT Systematization Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that AT Systematization Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is AT Systematization 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.

Over 12 months, AT Systematization Berhad reported revenue of RM25m, which is a gain of 46%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is AT Systematization Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months AT Systematization Berhad lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through RM44m of cash and made a loss of RM15m. Given it only has net cash of RM10.3m, the company may need to raise more capital if it doesn't reach break-even soon. AT Systematization Berhad's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for AT Systematization Berhad (3 make us uncomfortable!) that you should be aware of before investing here.

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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