Is Asia Poly Holdings Berhad (KLSE:ASIAPLY) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 is this debt a concern to shareholders?

When Is Debt A Problem?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

How Much Debt Does Asia Poly Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Asia Poly Holdings Berhad had RM62.1m of debt in June 2023, down from RM67.9m, one year before. On the flip side, it has RM33.2m in cash leading to net debt of about RM28.9m.

How Strong 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 RM47.8m falling due within a year, and liabilities of RM35.4m due beyond that. Offsetting these obligations, it had cash of RM33.2m as well as receivables valued at RM24.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM25.4m.

While this might seem like a lot, it is not so bad since Asia Poly Holdings Berhad has a market capitalization of RM86.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 20%, to RM102m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Asia Poly Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM8.3m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through RM24m of cash over the last year. So suffice it to say 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. For example, we've discovered 4 warning signs for Asia Poly Holdings Berhad (1 is a bit concerning!) that you should be aware of before investing here.

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. 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.