Does Ahmad Zaki Resources Berhad (KLSE:AZRB) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Ahmad Zaki Resources Berhad (KLSE:AZRB) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Ahmad Zaki Resources Berhad

What Is Ahmad Zaki Resources Berhad's Debt?

As you can see below, Ahmad Zaki Resources Berhad had RM2.91b of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of RM314.7m, its net debt is less, at about RM2.59b.

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

According to the last reported balance sheet, Ahmad Zaki Resources Berhad had liabilities of RM1.59b due within 12 months, and liabilities of RM3.02b due beyond 12 months. On the other hand, it had cash of RM314.7m and RM572.1m worth of receivables due within a year. So it has liabilities totalling RM3.72b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM161.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Ahmad Zaki Resources Berhad would likely require a major re-capitalisation if it had to pay its creditors today. 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 Ahmad Zaki Resources Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Ahmad Zaki Resources Berhad made a loss at the EBIT level, and saw its revenue drop to RM388m, which is a fall of 46%. To be frank that doesn't bode well.

Caveat Emptor

While Ahmad Zaki Resources Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping RM54m. 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 RM83m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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 3 warning signs we've spotted with Ahmad Zaki Resources Berhad (including 2 which make us uncomfortable) .

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.

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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.