Asia Poly Holdings Berhad (KLSE:ASIAPLY) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Asia Poly Holdings Berhad (KLSE:ASIAPLY) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Asia Poly Holdings Berhad

What Is Asia Poly Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Asia Poly Holdings Berhad had RM67.9m of debt, an increase on RM33.7m, over one year. However, because it has a cash reserve of RM48.1m, its net debt is less, at about RM19.8m.

How Healthy Is Asia Poly Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Asia Poly Holdings Berhad had liabilities of RM60.8m falling due within a year, and liabilities of RM39.2m due beyond that. Offsetting these obligations, it had cash of RM48.1m as well as receivables valued at RM20.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM31.6m.

This deficit isn't so bad because Asia Poly Holdings Berhad is worth RM96.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Asia Poly Holdings Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Asia Poly Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 15%, to RM85m. We would much prefer see growth.

Caveat Emptor

While Asia Poly Holdings 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 RM5.0m. 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. Another cause for caution is that is bled RM20m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Asia Poly Holdings Berhad .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.