Stock Analysis

Here's Why Axteria Group Berhad (KLSE:AXTERIA) Can Afford Some Debt

KLSE:AXTERIA
Source: Shutterstock

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Axteria Group Berhad (KLSE:AXTERIA) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Axteria Group Berhad

What Is Axteria Group Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Axteria Group Berhad had RM18.0m of debt, an increase on RM15.3m, over one year. However, because it has a cash reserve of RM3.58m, its net debt is less, at about RM14.4m.

debt-equity-history-analysis
KLSE:AXTERIA Debt to Equity History September 27th 2022

How Strong Is Axteria Group Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Axteria Group Berhad had liabilities of RM31.0m due within 12 months and liabilities of RM13.3m due beyond that. Offsetting this, it had RM3.58m in cash and RM8.93m in receivables that were due within 12 months. So its liabilities total RM31.8m more than the combination of its cash and short-term receivables.

Axteria Group Berhad has a market capitalization of RM67.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Axteria Group 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.

Over 12 months, Axteria Group Berhad reported revenue of RM27m, which is a gain of 115%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, Axteria Group Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM2.7m at the EBIT level. 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. However, it doesn't help that it burned through RM13m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Axteria Group Berhad is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

New: Manage All Your Stock Portfolios in One Place

We've created the ultimate portfolio companion for stock investors, and it's free.

• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks

Try a Demo Portfolio for Free

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.