Is Asia Poly Holdings Berhad (KLSE:ASIAPLY) Using Too Much 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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 Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

The image below, which you can click on for greater detail, shows that at December 2022 Asia Poly Holdings Berhad had debt of RM64.3m, up from RM33.8m in one year. However, it also had RM31.3m in cash, and so its net debt is RM33.0m.

A Look At Asia Poly Holdings Berhad's Liabilities

We can see from the most recent balance sheet that Asia Poly Holdings Berhad had liabilities of RM56.3m falling due within a year, and liabilities of RM36.5m due beyond that. On the other hand, it had cash of RM31.3m and RM22.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM38.8m.

Asia Poly Holdings Berhad has a market capitalization of RM105.4m, 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. 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.

Over 12 months, Asia Poly Holdings Berhad reported revenue of RM92m, which is a gain of 9.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Asia Poly Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM5.8m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 RM29m in negative free cash flow over the last twelve months. 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. Case in point: We've spotted 4 warning signs for Asia Poly Holdings Berhad you should be aware of, and 1 of them doesn't sit too well with us.

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. 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.