AE Multi Holdings Berhad (KLSE:AEM) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that AE Multi Holdings Berhad (KLSE:AEM) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 AE Multi Holdings Berhad

What Is AE Multi Holdings Berhad's Net Debt?

As you can see below, at the end of September 2024, AE Multi Holdings Berhad had RM49.6m of debt, up from RM46.9m a year ago. Click the image for more detail. But on the other hand it also has RM61.2m in cash, leading to a RM11.6m net cash position.

How Strong Is AE Multi Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that AE Multi Holdings Berhad had liabilities of RM93.2m falling due within a year, and liabilities of RM1.06m due beyond that. Offsetting these obligations, it had cash of RM61.2m as well as receivables valued at RM27.9m due within 12 months. So its liabilities total RM5.23m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since AE Multi Holdings Berhad has a market capitalization of RM17.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, AE Multi Holdings Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is AE Multi Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, AE Multi Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM104m, which is a fall of 12%. We would much prefer see growth.

So How Risky Is AE Multi Holdings Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year AE Multi Holdings Berhad had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through RM3.1m of cash and made a loss of RM18m. While this does make the company a bit risky, it's important to remember it has net cash of RM11.6m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with AE Multi Holdings Berhad .

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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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.