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

Warren Buffett famously said, '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. As with many other companies Asia Poly Holdings Berhad (KLSE:ASIAPLY) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. 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 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 RM57.7m of debt in December 2023, down from RM64.3m, one year before. However, because it has a cash reserve of RM25.1m, its net debt is less, at about RM32.6m.

A Look At Asia Poly Holdings Berhad's Liabilities

The latest balance sheet data shows that Asia Poly Holdings Berhad had liabilities of RM50.9m due within a year, and liabilities of RM34.8m falling due after that. Offsetting these obligations, it had cash of RM25.1m as well as receivables valued at RM21.9m due within 12 months. So it has liabilities totalling RM38.7m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Asia Poly Holdings Berhad is worth RM67.1m, 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 it is Asia Poly Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. 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 RM111m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Asia Poly Holdings Berhad's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at RM6.3m. 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. Another cause for caution is that is bled RM4.8m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. We've identified 3 warning signs with Asia Poly Holdings Berhad (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.