Is AIZO Group Berhad (KLSE:AIZO) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that AIZO Group Berhad (KLSE:AIZO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

We've discovered 3 warning signs about AIZO Group Berhad. View them for free.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

What Is AIZO Group Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that AIZO Group Berhad had RM35.6m of debt in December 2024, down from RM39.9m, one year before. However, it does have RM15.2m in cash offsetting this, leading to net debt of about RM20.4m.

How Strong Is AIZO Group Berhad's Balance Sheet?

According to the last reported balance sheet, AIZO Group Berhad had liabilities of RM64.0m due within 12 months, and liabilities of RM16.4m due beyond 12 months. Offsetting these obligations, it had cash of RM15.2m as well as receivables valued at RM50.3m due within 12 months. So its liabilities total RM14.9m more than the combination of its cash and short-term receivables.

Given AIZO Group Berhad has a market capitalization of RM184.3m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 AIZO Group 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.

Check out our latest analysis for AIZO Group Berhad

In the last year AIZO Group Berhad had a loss before interest and tax, and actually shrunk its revenue by 8.3%, to RM120m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months AIZO Group Berhad produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at RM11m. 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. However, it doesn't help that it burned through RM7.7m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with AIZO Group Berhad (including 1 which doesn't sit too well with us) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.