Here's Why Aemulus Holdings Berhad (KLSE:AEMULUS) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Aemulus Holdings Berhad (KLSE:AEMULUS) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Aemulus Holdings Berhad

What Is Aemulus Holdings Berhad's Debt?

As you can see below, at the end of June 2022, Aemulus Holdings Berhad had RM34.9m of debt, up from RM26.7m a year ago. Click the image for more detail. However, it does have RM60.0m in cash offsetting this, leading to net cash of RM25.0m.

A Look At Aemulus Holdings Berhad's Liabilities

We can see from the most recent balance sheet that Aemulus Holdings Berhad had liabilities of RM37.4m falling due within a year, and liabilities of RM17.3m due beyond that. Offsetting this, it had RM60.0m in cash and RM60.4m in receivables that were due within 12 months. So it can boast RM65.7m more liquid assets than total liabilities.

This excess liquidity suggests that Aemulus Holdings Berhad is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Aemulus Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Aemulus Holdings Berhad has boosted its EBIT by 84%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Aemulus Holdings Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Aemulus Holdings Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Aemulus Holdings Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Aemulus Holdings Berhad has RM25.0m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 84% over the last year. So we don't think Aemulus Holdings Berhad's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Aemulus Holdings Berhad you should be aware of, and 1 of them is a bit concerning.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.