Is AE Multi Holdings Berhad (KLSE:AEM) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 AE Multi Holdings Berhad (KLSE:AEM) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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?

The image below, which you can click on for greater detail, shows that at March 2021 AE Multi Holdings Berhad had debt of RM39.7m, up from RM31.5m in one year. However, because it has a cash reserve of RM39.1m, its net debt is less, at about RM637.0k.

How Healthy 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 RM108.4m falling due within a year, and liabilities of RM3.28m due beyond that. On the other hand, it had cash of RM39.1m and RM58.8m worth of receivables due within a year. So it has liabilities totalling RM13.9m more than its cash and near-term receivables, combined.

This deficit isn't so bad because AE Multi Holdings Berhad is worth RM36.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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 reported revenue of RM68m, which is a gain of 2.7%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months AE Multi Holdings Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM6.7m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM6.9m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for AE Multi Holdings Berhad (of which 3 can't be ignored!) 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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This article by Simply Wall St is general in nature. 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.
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