Is Atlan Holdings Bhd (KLSE:ATLAN) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Atlan Holdings Bhd (KLSE:ATLAN) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Atlan Holdings Bhd

What Is Atlan Holdings Bhd's Debt?

As you can see below, Atlan Holdings Bhd had RM45.4m of debt at November 2020, down from RM77.7m a year prior. However, its balance sheet shows it holds RM286.4m in cash, so it actually has RM241.0m net cash.

How Strong Is Atlan Holdings Bhd's Balance Sheet?

The latest balance sheet data shows that Atlan Holdings Bhd had liabilities of RM152.3m due within a year, and liabilities of RM120.7m falling due after that. On the other hand, it had cash of RM286.4m and RM98.9m worth of receivables due within a year. So it actually has RM112.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Atlan Holdings Bhd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Atlan Holdings Bhd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Atlan Holdings Bhd'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.

In the last year Atlan Holdings Bhd had a loss before interest and tax, and actually shrunk its revenue by 43%, to RM481m. That makes us nervous, to say the least.

So How Risky Is Atlan Holdings Bhd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Atlan Holdings Bhd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through RM13m of cash and made a loss of RM35m. Given it only has net cash of RM241.0m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Case in point: We've spotted 2 warning signs for Atlan Holdings Bhd you should be aware of, and 1 of them is potentially serious.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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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