Here's Why Acoustech Berhad (KLSE:ACOSTEC) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Acoustech Berhad (KLSE:ACOSTEC) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Acoustech Berhad

What Is Acoustech Berhad's Net Debt?

As you can see below, Acoustech Berhad had RM16.8m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM12.0m in cash offsetting this, leading to net debt of about RM4.81m.

A Look At Acoustech Berhad's Liabilities

According to the last reported balance sheet, Acoustech Berhad had liabilities of RM28.7m due within 12 months, and liabilities of RM15.8m due beyond 12 months. Offsetting these obligations, it had cash of RM12.0m as well as receivables valued at RM9.10m due within 12 months. So it has liabilities totalling RM23.4m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Acoustech Berhad has a market capitalization of RM89.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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 Acoustech Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Acoustech Berhad had a loss before interest and tax, and actually shrunk its revenue by 34%, to RM7.0m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Acoustech Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM27m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled RM22m 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. For example, we've discovered 6 warning signs for Acoustech Berhad (3 make us uncomfortable!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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