Is AE Multi Holdings Berhad (KLSE:AEM) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 AE Multi Holdings Berhad (KLSE:AEM) makes use of debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

What Is AE Multi Holdings Berhad's Net Debt?

As you can see below, at the end of December 2024, AE Multi Holdings Berhad had RM51.2m of debt, up from RM48.3m a year ago. Click the image for more detail. But on the other hand it also has RM56.6m in cash, leading to a RM5.40m net cash position.

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

Zooming in on the latest balance sheet data, we can see that AE Multi Holdings Berhad had liabilities of RM90.8m due within 12 months and liabilities of RM957.0k due beyond that. On the other hand, it had cash of RM56.6m and RM28.8m worth of receivables due within a year. So its liabilities total RM6.37m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because AE Multi Holdings Berhad is worth RM13.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, AE Multi Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

View our latest analysis for AE Multi Holdings Berhad

In the last year AE Multi Holdings Berhad's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is AE Multi Holdings Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that AE Multi Holdings Berhad had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through RM6.3m of cash and made a loss of RM17m. While this does make the company a bit risky, it's important to remember it has net cash of RM5.40m. 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for AE Multi Holdings Berhad that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.