Aemulus Holdings Berhad (KLSE:AEMULUS) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Aemulus Holdings Berhad (KLSE:AEMULUS) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Aemulus Holdings Berhad

How Much Debt Does Aemulus Holdings Berhad Carry?

As you can see below, at the end of March 2024, Aemulus Holdings Berhad had RM41.6m of debt, up from RM35.3m a year ago. Click the image for more detail. However, because it has a cash reserve of RM23.6m, its net debt is less, at about RM18.0m.

A Look At Aemulus Holdings Berhad's Liabilities

According to the last reported balance sheet, Aemulus Holdings Berhad had liabilities of RM37.2m due within 12 months, and liabilities of RM14.4m due beyond 12 months. Offsetting this, it had RM23.6m in cash and RM53.3m in receivables that were due within 12 months. So it can boast RM25.2m more liquid assets than total liabilities.

This surplus suggests that Aemulus Holdings Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 Aemulus Holdings 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 Aemulus Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 48%, to RM26m. That makes us nervous, to say the least.

Caveat Emptor

While Aemulus 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 RM36m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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. For example Aemulus Holdings Berhad has 4 warning signs (and 1 which is potentially serious) we think you should know about.

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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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.