Does Alam Maritim Resources Berhad (KLSE:ALAM) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Alam Maritim Resources Berhad (KLSE:ALAM) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Alam Maritim Resources Berhad

How Much Debt Does Alam Maritim Resources Berhad Carry?

The chart below, which you can click on for greater detail, shows that Alam Maritim Resources Berhad had RM107.4m in debt in December 2021; about the same as the year before. On the flip side, it has RM52.4m in cash leading to net debt of about RM55.0m.

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

The latest balance sheet data shows that Alam Maritim Resources Berhad had liabilities of RM199.0m due within a year, and liabilities of RM6.69m falling due after that. Offsetting these obligations, it had cash of RM52.4m as well as receivables valued at RM137.7m due within 12 months. So it has liabilities totalling RM15.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Alam Maritim Resources Berhad has a market capitalization of RM45.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Alam Maritim 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 Alam Maritim Resources Berhad had a loss before interest and tax, and actually shrunk its revenue by 43%, to RM146m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Alam Maritim 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 RM155m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM8.9m of cash over the last year. So suffice it to say we consider the stock very 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. To that end, you should be aware of the 3 warning signs we've spotted with Alam Maritim Resources Berhad .

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.