Would Ann Joo Resources Berhad (KLSE:ANNJOO) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Ann Joo Resources Berhad (KLSE:ANNJOO) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Ann Joo Resources Berhad

How Much Debt Does Ann Joo Resources Berhad Carry?

As you can see below, Ann Joo Resources Berhad had RM1.03b of debt at September 2020, down from RM1.21b a year prior. However, because it has a cash reserve of RM39.6m, its net debt is less, at about RM994.2m.

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

The latest balance sheet data shows that Ann Joo Resources Berhad had liabilities of RM1.13b due within a year, and liabilities of RM70.6m falling due after 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.

This deficit is considerable relative to its market capitalization of RM1.19b, so it does suggest shareholders should keep an eye on Ann Joo Resources Berhad's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Ann Joo Resources Berhad made a loss at the EBIT level, and saw its revenue drop to RM2.0b, which is a fall of 15%. That's not what we would hope to see.

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. To be specific the EBIT loss came in at RM78m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of RM87m into a profit. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. 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.

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.

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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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