Does Asian Pac Holdings Berhad (KLSE:ASIAPAC) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Asian Pac Holdings Berhad (KLSE:ASIAPAC) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Asian Pac Holdings Berhad

What Is Asian Pac Holdings Berhad's Debt?

As you can see below, at the end of March 2021, Asian Pac Holdings Berhad had RM485.8m of debt, up from RM461.0m a year ago. Click the image for more detail. However, it does have RM86.4m in cash offsetting this, leading to net debt of about RM399.4m.

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

Zooming in on the latest balance sheet data, we can see that Asian Pac Holdings Berhad had liabilities of RM238.0m due within 12 months and liabilities of RM728.5m due beyond that. Offsetting this, it had RM86.4m in cash and RM54.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM825.5m.

This deficit casts a shadow over the RM157.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. 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 50%, to RM88m. That makes us nervous, to say the least.

Caveat Emptor

While Asian Pac Holdings Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable RM29m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of RM30m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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 Asian Pac Holdings Berhad (2 are concerning) you should be aware of.

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.
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