Is Aemulus Holdings Berhad (KLSE:AEMULUS) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Aemulus Holdings Berhad (KLSE:AEMULUS) makes use of debt. 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. If things get really bad, the lenders can take control of the business. 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. 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.

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 2021 Aemulus Holdings Berhad had RM25.2m of debt, an increase on RM17.7m, over one year. But it also has RM83.4m in cash to offset that, meaning it has RM58.2m net cash.

How Strong Is Aemulus Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Aemulus Holdings Berhad had liabilities of RM32.3m due within 12 months, and liabilities of RM17.7m due beyond 12 months. Offsetting these obligations, it had cash of RM83.4m as well as receivables valued at RM45.8m due within 12 months. So it can boast RM79.2m more liquid assets than total liabilities.

It's good to see that Aemulus Holdings Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Aemulus Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Aemulus Holdings Berhad grew its EBIT by 1,592% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Aemulus Holdings Berhad has RM58.2m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 1,592% over the last year. So is Aemulus Holdings Berhad's debt a risk? It doesn't seem so to us. 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 3 warning signs for Aemulus Holdings Berhad (of which 1 is a bit concerning!) 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.