Asia Poly Holdings Berhad (KLSE:ASIAPLY) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Asia Poly Holdings Berhad (KLSE:ASIAPLY) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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.

See our latest analysis for Asia Poly Holdings Berhad

How Much Debt Does Asia Poly Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Asia Poly Holdings Berhad had RM61.9m of debt, an increase on RM37.4m, over one year. However, it does have RM25.8m in cash offsetting this, leading to net debt of about RM36.1m.

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

According to the last reported balance sheet, Asia Poly Holdings Berhad had liabilities of RM52.1m due within 12 months, and liabilities of RM36.0m due beyond 12 months. On the other hand, it had cash of RM25.8m and RM23.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM38.3m.

Asia Poly Holdings Berhad has a market capitalization of RM95.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Asia Poly Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to RM98m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Asia Poly Holdings Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost RM7.0m at the EBIT level. 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. However, it doesn't help that it burned through RM22m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Asia Poly Holdings Berhad has 4 warning signs (and 2 which can't be ignored) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.