Is Asia Poly Holdings Berhad (KLSE:ASIAPLY) 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, Asia Poly Holdings Berhad (KLSE:ASIAPLY) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Asia Poly Holdings Berhad

What Is Asia Poly Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Asia Poly Holdings Berhad had debt of RM29.7m, up from RM8.32m in one year. However, its balance sheet shows it holds RM73.0m in cash, so it actually has RM43.3m net cash.

A Look At Asia Poly Holdings Berhad's Liabilities

According to the last reported balance sheet, Asia Poly Holdings Berhad had liabilities of RM52.3m due within 12 months, and liabilities of RM6.04m due beyond 12 months. On the other hand, it had cash of RM73.0m and RM24.7m worth of receivables due within a year. So it can boast RM39.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Asia Poly Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Asia Poly Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Asia Poly Holdings Berhad turned things around in the last 12 months, delivering and EBIT of RM8.2m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Asia Poly Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Asia Poly Holdings Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Asia Poly Holdings Berhad generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Asia Poly Holdings Berhad has RM43.3m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in RM7.7m. So we don't think Asia Poly Holdings Berhad's use of debt is risky. 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 instance, we've identified 4 warning signs for Asia Poly Holdings Berhad (2 don't sit too well with us) you should be aware of.

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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