Health Check: How Prudently Does ASTEEL Group Berhad (KLSE:ASTEEL) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, ASTEEL Group Berhad (KLSE:ASTEEL) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out 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 December 2023 ASTEEL Group Berhad had debt of RM116.4m, up from RM87.6m in one year. However, it also had RM31.9m in cash, and so its net debt is RM84.5m.

A Look At ASTEEL Group Berhad's Liabilities

The latest balance sheet data shows that ASTEEL Group Berhad had liabilities of RM132.9m due within a year, and liabilities of RM28.7m falling due after that. On the other hand, it had cash of RM31.9m and RM60.5m worth of receivables due within a year. So its liabilities total RM69.2m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's RM48.5m market capitalization, you might well be inclined to review the balance sheet intently. 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 it is ASTEEL Group 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 ASTEEL Group Berhad had a loss before interest and tax, and actually shrunk its revenue by 8.5%, to RM253m. That's not what we would hope to see.

Caveat Emptor

Importantly, ASTEEL Group Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM1.1m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of RM13m over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for ASTEEL Group Berhad (1 can't be ignored) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.