Stock Analysis

Ahmad Zaki Resources Berhad (KLSE:AZRB) Has Debt But No Earnings; Should You Worry?

KLSE:AZRB
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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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Ahmad Zaki Resources Berhad (KLSE:AZRB) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ahmad Zaki Resources Berhad

What Is Ahmad Zaki Resources Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that Ahmad Zaki Resources Berhad had RM2.90b in debt in December 2020; about the same as the year before. However, it does have RM574.9m in cash offsetting this, leading to net debt of about RM2.33b.

debt-equity-history-analysis
KLSE:AZRB Debt to Equity History March 31st 2021

How Strong Is Ahmad Zaki Resources Berhad's Balance Sheet?

We can see from the most recent balance sheet that Ahmad Zaki Resources Berhad had liabilities of RM1.22b falling due within a year, and liabilities of RM2.92b due beyond that. Offsetting these obligations, it had cash of RM574.9m as well as receivables valued at RM679.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM2.88b.

The deficiency here weighs heavily on the RM175.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Ahmad Zaki Resources Berhad would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ahmad Zaki Resources Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Ahmad Zaki Resources Berhad had a loss before interest and tax, and actually shrunk its revenue by 18%, to RM854m. We would much prefer see growth.

Caveat Emptor

Not only did Ahmad Zaki Resources Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM53m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost RM90m in the last year. So we think buying this stock is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Ahmad Zaki Resources Berhad (2 are potentially serious) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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