Is Ann Joo Resources Berhad (KLSE:ANNJOO) A Risky Investment?

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. Importantly, Ann Joo Resources Berhad (KLSE:ANNJOO) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Ann Joo Resources Berhad

What Is Ann Joo Resources Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Ann Joo Resources Berhad had debt of RM1.03b at the end of September 2020, a reduction from RM1.21b over a year. However, it also had RM39.6m in cash, and so its net debt is RM994.2m.

How Healthy 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 RM1.13b falling due within a year, and liabilities of RM70.6m due beyond that. On the other hand, it had cash of RM39.6m and RM394.7m worth of receivables due within a year. So it has liabilities totalling RM768.5m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of RM572.0m, we think shareholders really should watch Ann Joo Resources Berhad's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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 had a loss before interest and tax, and actually shrunk its revenue by 15%, to RM2.0b. We would much prefer see growth.

Caveat Emptor

While Ann Joo 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. Its EBIT loss was a whopping RM78m. 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. It's fair to say the loss of RM87m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Ann Joo Resources Berhad (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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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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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