Stock Analysis

Is AT Systematization Berhad (KLSE:AT) Weighed On By Its Debt Load?

KLSE:AT
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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that AT Systematization Berhad (KLSE:AT) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that AT Systematization Berhad had RM38.4m of debt in March 2023, down from RM75.1m, one year before. However, its balance sheet shows it holds RM60.4m in cash, so it actually has RM22.0m net cash.

debt-equity-history-analysis
KLSE:AT Debt to Equity History August 2nd 2023

How Strong Is AT Systematization Berhad's Balance Sheet?

According to the last reported balance sheet, AT Systematization Berhad had liabilities of RM88.6m due within 12 months, and liabilities of RM9.03m due beyond 12 months. On the other hand, it had cash of RM60.4m and RM16.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM20.6m.

This deficit isn't so bad because AT Systematization Berhad is worth RM101.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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. There's no doubt that we learn most about debt from the balance sheet. 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 made a loss at the EBIT level, and saw its revenue drop to RM61m, which is a fall of 22%. To be frank that doesn't bode well.

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. Indeed, in that time it burnt through RM2.0m of cash and made a loss of RM83m. With only RM22.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 (2 are a bit concerning!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.