Is ACME Holdings Berhad (KLSE:ACME) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, ACME Holdings Berhad (KLSE:ACME) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for ACME Holdings Berhad

How Much Debt Does ACME Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 ACME Holdings Berhad had RM8.24m of debt, an increase on RM7.92m, over one year. But it also has RM11.4m in cash to offset that, meaning it has RM3.20m net cash.

A Look At ACME Holdings Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that ACME Holdings Berhad had liabilities of RM37.7m due within 12 months and liabilities of RM6.17m due beyond that. Offsetting this, it had RM11.4m in cash and RM70.7m in receivables that were due within 12 months. So it can boast RM38.4m more liquid assets than total liabilities.

This surplus liquidity suggests that ACME Holdings Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, ACME Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, ACME Holdings Berhad grew its EBIT by 485% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is ACME Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. ACME Holdings Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, ACME Holdings Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that ACME Holdings Berhad has net cash of RM3.20m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 485% over the last year. So is ACME Holdings Berhad's debt a risk? It doesn't seem so to us. 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. Be aware that ACME Holdings Berhad is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.