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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, AE Multi Holdings Berhad (KLSE:AEM) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for AE Multi Holdings Berhad

How Much Debt Does AE Multi Holdings Berhad Carry?

As you can see below, at the end of June 2023, AE Multi Holdings Berhad had RM41.1m of debt, up from RM34.5m a year ago. Click the image for more detail. However, it does have RM66.8m in cash offsetting this, leading to net cash of RM25.7m.

A Look At AE Multi Holdings Berhad's Liabilities

According to the last reported balance sheet, AE Multi Holdings Berhad had liabilities of RM81.8m due within 12 months, and liabilities of RM1.82m due beyond 12 months. Offsetting this, it had RM66.8m in cash and RM27.9m in receivables that were due within 12 months. So it actually has RM11.0m more liquid assets than total liabilities.

This luscious liquidity implies that AE Multi Holdings Berhad's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that AE Multi 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 AE Multi Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, AE Multi Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM105m, which is a fall of 23%. To be frank that doesn't bode well.

So How Risky Is AE Multi Holdings Berhad?

Although AE Multi Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM5.1m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 .

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.