Does ASTEEL Group Berhad (KLSE:ASTEEL) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, ASTEEL Group Berhad (KLSE:ASTEEL) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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 ASTEEL Group Berhad

How Much Debt Does ASTEEL Group Berhad Carry?

The image below, which you can click on for greater detail, shows that at June 2023 ASTEEL Group Berhad had debt of RM105.5m, up from RM97.1m in one year. On the flip side, it has RM25.6m in cash leading to net debt of about RM79.9m.

How Strong Is ASTEEL Group Berhad's Balance Sheet?

We can see from the most recent balance sheet that ASTEEL Group Berhad had liabilities of RM127.4m falling due within a year, and liabilities of RM27.6m due beyond that. Offsetting these obligations, it had cash of RM25.6m as well as receivables valued at RM58.5m due within 12 months. So it has liabilities totalling RM70.9m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of RM48.5m, we think shareholders really should watch ASTEEL Group Berhad's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since ASTEEL Group 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, ASTEEL Group Berhad saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, ASTEEL Group Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM1.4m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of RM7.1m. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example ASTEEL Group Berhad has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.