Would Alam Maritim Resources Berhad (KLSE:ALAM) Be Better Off With Less 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.' 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. As with many other companies Alam Maritim Resources Berhad (KLSE:ALAM) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Alam Maritim Resources Berhad

What Is Alam Maritim Resources Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Alam Maritim Resources Berhad had RM102.2m of debt in December 2020, down from RM122.0m, one year before. However, because it has a cash reserve of RM53.1m, its net debt is less, at about RM49.1m.

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

According to the last reported balance sheet, Alam Maritim Resources Berhad had liabilities of RM245.3m due within 12 months, and liabilities of RM8.26m due beyond 12 months. On the other hand, it had cash of RM53.1m and RM167.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM33.4m.

While this might seem like a lot, it is not so bad since Alam Maritim Resources Berhad has a market capitalization of RM107.5m, 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 you can't view debt in total isolation; since Alam Maritim 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 Alam Maritim Resources Berhad had a loss before interest and tax, and actually shrunk its revenue by 19%, to RM248m. That's not what we would hope to see.

Caveat Emptor

While Alam Maritim 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. Indeed, it lost a very considerable RM95m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM12m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Alam Maritim Resources Berhad you should be aware of, and 1 of them doesn't sit too well with us.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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