Health Check: How Prudently Does Aemulus Holdings Berhad (KLSE:AEMULUS) Use Debt?

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.' 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. Importantly, Aemulus Holdings Berhad (KLSE:AEMULUS) does carry debt. But the more important question is: how much risk is that debt creating?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Aemulus Holdings Berhad

What Is Aemulus Holdings Berhad's Debt?

As you can see below, Aemulus Holdings Berhad had RM34.8m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds RM34.9m in cash, so it actually has RM102.0k net cash.

How Strong Is Aemulus Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Aemulus Holdings Berhad had liabilities of RM27.5m due within a year, and liabilities of RM15.5m falling due after that. Offsetting these obligations, it had cash of RM34.9m as well as receivables valued at RM59.3m due within 12 months. So it actually has RM51.1m more liquid assets than total liabilities.

This surplus liquidity suggests that Aemulus Holdings Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Aemulus Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Aemulus 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 Aemulus Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 48%, to RM37m. That makes us nervous, to say the least.

So How Risky Is Aemulus Holdings Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Aemulus Holdings Berhad lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through RM25m of cash and made a loss of RM15m. Given it only has net cash of RM102.0k, 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. 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 example, we've discovered 1 warning sign for Aemulus Holdings Berhad that you should be aware of before investing here.

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.