Is Ahmad Zaki Resources Berhad (KLSE:AZRB) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Ahmad Zaki Resources Berhad (KLSE:AZRB) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for Ahmad Zaki Resources Berhad

How Much Debt Does Ahmad Zaki Resources Berhad Carry?

The chart below, which you can click on for greater detail, shows that Ahmad Zaki Resources Berhad had RM3.02b in debt in March 2023; about the same as the year before. However, it does have RM320.1m in cash offsetting this, leading to net debt of about RM2.70b.

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

Zooming in on the latest balance sheet data, we can see that Ahmad Zaki Resources Berhad had liabilities of RM1.34b due within 12 months and liabilities of RM3.14b due beyond that. Offsetting these obligations, it had cash of RM320.1m as well as receivables valued at RM489.0m due within 12 months. So it has liabilities totalling RM3.68b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM101.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. 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 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.

Over 12 months, Ahmad Zaki Resources Berhad made a loss at the EBIT level, and saw its revenue drop to RM356m, which is a fall of 57%. 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 RM75m. 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. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost RM105m in the last year. So we think buying this stock is risky. 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 3 warning signs for Ahmad Zaki Resources Berhad (of which 2 make us uncomfortable!) you should know about.

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.