Stock Analysis

Is AT Systematization Berhad (KLSE:AT) Using Too Much Debt?

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. Importantly, AT Systematization Berhad (KLSE:AT) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for AT Systematization Berhad

What Is AT Systematization Berhad's Debt?

As you can see below, at the end of June 2022, AT Systematization Berhad had RM75.3m of debt, up from RM10.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM94.6m in cash, so it actually has RM19.2m net cash.

debt-equity-history-analysis
KLSE:AT Debt to Equity History September 2nd 2022

A Look At AT Systematization Berhad's Liabilities

According to the last reported balance sheet, AT Systematization Berhad had liabilities of RM122.5m due within 12 months, and liabilities of RM11.3m due beyond 12 months. Offsetting these obligations, it had cash of RM94.6m as well as receivables valued at RM37.6m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that AT Systematization Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the RM90.0m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, AT Systematization Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since AT Systematization 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.

In the last year AT Systematization Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to RM68m. With any luck the company will be able to grow its way to profitability.

So How Risky Is AT Systematization Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that AT Systematization Berhad had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of RM42m and booked a RM142m accounting loss. With only RM19.2m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, AT Systematization Berhad may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with AT Systematization Berhad (including 2 which are a bit unpleasant) .

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.

Valuation is complex, but we're helping make it simple.

Find out whether AT Systematization Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.