Asian Pac Holdings Berhad (KLSE:ASIAPAC) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, '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. As with many other companies Asian Pac Holdings Berhad (KLSE:ASIAPAC) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Asian Pac Holdings Berhad

What Is Asian Pac Holdings Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Asian Pac Holdings Berhad had RM475.7m in debt in September 2021; about the same as the year before. However, because it has a cash reserve of RM45.8m, its net debt is less, at about RM429.9m.

How Healthy Is Asian Pac Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Asian Pac Holdings Berhad had liabilities of RM229.0m due within a year, and liabilities of RM725.7m falling due after that. Offsetting this, it had RM45.8m in cash and RM86.4m in receivables that were due within 12 months. So its liabilities total RM822.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM141.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Asian Pac Holdings Berhad would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Asian Pac 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.

In the last year Asian Pac Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 40%, to RM82m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Asian Pac Holdings 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 RM26m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost RM25m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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. To that end, you should learn about the 3 warning signs we've spotted with Asian Pac Holdings Berhad (including 2 which make us uncomfortable) .

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.