Is Ajinomoto (Malaysia) Berhad (KLSE:AJI) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Ajinomoto (Malaysia) Berhad (KLSE:AJI) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ajinomoto (Malaysia) Berhad

What Is Ajinomoto (Malaysia) Berhad's Net Debt?

As you can see below, at the end of March 2021, Ajinomoto (Malaysia) Berhad had RM99.8m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has RM218.4m in cash, leading to a RM118.6m net cash position.

A Look At Ajinomoto (Malaysia) Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Ajinomoto (Malaysia) Berhad had liabilities of RM103.6m due within 12 months and liabilities of RM113.7m due beyond that. Offsetting this, it had RM218.4m in cash and RM58.2m in receivables that were due within 12 months. So it actually has RM59.4m more liquid assets than total liabilities.

This surplus suggests that Ajinomoto (Malaysia) Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Ajinomoto (Malaysia) Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Ajinomoto (Malaysia) Berhad's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Ajinomoto (Malaysia) Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Ajinomoto (Malaysia) Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Ajinomoto (Malaysia) Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Ajinomoto (Malaysia) Berhad has RM118.6m in net cash and a decent-looking balance sheet. So we don't have any problem with Ajinomoto (Malaysia) Berhad's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Ajinomoto (Malaysia) 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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