Stock Analysis

Is Alam Maritim Resources Berhad (KLSE:ALAM) Using Debt Sensibly?

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KLSE:ALAM
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Alam Maritim Resources Berhad (KLSE:ALAM) 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. 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. 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 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?

The chart below, which you can click on for greater detail, shows that Alam Maritim Resources Berhad had RM109.1m in debt in June 2022; about the same as the year before. However, because it has a cash reserve of RM55.4m, its net debt is less, at about RM53.7m.

debt-equity-history-analysis
KLSE:ALAM Debt to Equity History September 29th 2022

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 RM182.6m due within 12 months and liabilities of RM6.41m due beyond that. Offsetting these obligations, it had cash of RM55.4m as well as receivables valued at RM93.6m due within 12 months. So its liabilities total RM40.1m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of RM46.0m, so it does suggest shareholders should keep an eye on Alam Maritim Resources Berhad's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Alam Maritim 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, Alam Maritim Resources Berhad reported revenue of RM185m, which is a gain of 29%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Alam Maritim Resources Berhad managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping RM126m. 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 RM8.1m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Alam Maritim Resources Berhad (2 are a bit unpleasant) you should be aware of.

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.

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Find out whether Alam Maritim 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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About KLSE:ALAM

Alam Maritim Resources Berhad

Alam Maritim Resources Berhad, an investment holding company, provides services to the oil and gas industry in Malaysia.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth0
Past Performance0
Financial Health0
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Slightly overvalued with weak fundamentals.