Alam Maritim Resources Berhad (KLSE:ALAM) Is Carrying A Fair Bit Of Debt

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 can see that Alam Maritim Resources Berhad (KLSE:ALAM) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Alam Maritim Resources Berhad

How Much Debt Does Alam Maritim Resources Berhad Carry?

As you can see below, Alam Maritim Resources Berhad had RM93.0m of debt at September 2020, down from RM119.4m a year prior. However, because it has a cash reserve of RM45.7m, its net debt is less, at about RM47.3m.

How Healthy Is Alam Maritim Resources Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Alam Maritim Resources Berhad had liabilities of RM172.3m due within 12 months and liabilities of RM17.9m due beyond that. Offsetting this, it had RM45.7m in cash and RM149.0m in receivables that were due within 12 months. So it can boast RM4.52m more liquid assets than total liabilities.

This surplus suggests that Alam Maritim Resources Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Alam Maritim Resources Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Alam Maritim Resources Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to RM282m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Alam Maritim Resources Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM91m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. 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. For instance, we've identified 2 warning signs for Alam Maritim Resources Berhad that 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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