Stock Analysis

Is Ahmad Zaki Resources Berhad (KLSE:AZRB) Using Debt In A Risky Way?

KLSE:AZRB
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Ahmad Zaki Resources Berhad (KLSE:AZRB) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 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

How Much Debt Does Ahmad Zaki Resources Berhad Carry?

As you can see below, Ahmad Zaki Resources Berhad had RM2.92b of debt, at December 2021, 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 RM332.7m, its net debt is less, at about RM2.59b.

debt-equity-history-analysis
KLSE:AZRB Debt to Equity History May 13th 2022

A Look At Ahmad Zaki Resources Berhad's Liabilities

We can see from the most recent balance sheet that Ahmad Zaki Resources Berhad had liabilities of RM1.18b falling due within a year, and liabilities of RM2.95b due beyond that. Offsetting these obligations, it had cash of RM332.7m as well as receivables valued at RM538.1m due within 12 months. So its liabilities total RM3.25b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the RM119.3m 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 definitely think shareholders need to watch this one closely. At the end of the day, Ahmad Zaki Resources Berhad would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ahmad Zaki Resources 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 Ahmad Zaki Resources Berhad's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Ahmad Zaki Resources Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM51m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the fact is that it incinerated RM48m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So is this a high risk stock? We think so, and we'd avoid it. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Ahmad Zaki Resources Berhad (of which 1 makes us a bit uncomfortable!) you should know about.

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 Ahmad Zaki Resources 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.