Is Aemulus Holdings Berhad (KLSE:AEMULUS) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Aemulus Holdings Berhad had RM17.7m of debt, an increase on RM13.6m, over one year. However, it does have RM23.4m in cash offsetting this, leading to net cash of RM5.72m.

How Healthy Is Aemulus Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Aemulus Holdings Berhad had liabilities of RM19.0m falling due within a year, and liabilities of RM13.0m due beyond that. On the other hand, it had cash of RM23.4m and RM28.0m worth of receivables due within a year. So it can boast RM19.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Aemulus Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Aemulus Holdings Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Aemulus Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 4.2%, to RM26m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Aemulus Holdings Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Aemulus Holdings Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM12m and booked a RM110k accounting loss. Given it only has net cash of RM5.72m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Aemulus Holdings Berhad 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.

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