Health Check: How Prudently Does Ann Joo Resources Berhad (KLSE:ANNJOO) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Ann Joo Resources Berhad (KLSE:ANNJOO) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Ann Joo Resources Berhad

What Is Ann Joo Resources Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Ann Joo Resources Berhad had RM1.32b of debt, an increase on RM995.0m, over one year. However, because it has a cash reserve of RM140.9m, its net debt is less, at about RM1.18b.

How Strong Is Ann Joo Resources Berhad's Balance Sheet?

We can see from the most recent balance sheet that Ann Joo Resources Berhad had liabilities of RM1.57b falling due within a year, and liabilities of RM58.8m due beyond that. Offsetting this, it had RM140.9m in cash and RM644.2m in receivables that were due within 12 months. So its liabilities total RM847.1m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's RM802.7m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ann Joo Resources 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.

In the last year Ann Joo Resources Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to RM3.0b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Ann Joo Resources Berhad's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at RM62m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of RM251m over the last twelve months. That means it's on the risky side of things. 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. For example, we've discovered 2 warning signs for Ann Joo Resources Berhad (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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. 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.