Is AE Multi Holdings Berhad (KLSE:AEM) Weighed On By Its Debt Load?

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 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. As with many other companies AE Multi Holdings Berhad (KLSE:AEM) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 December 2023, AE Multi Holdings Berhad had RM48.3m of debt, up from RM44.6m a year ago. Click the image for more detail. But on the other hand it also has RM69.1m in cash, leading to a RM20.8m net cash position.

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

According to the last reported balance sheet, AE Multi Holdings Berhad had liabilities of RM87.3m due within 12 months, and liabilities of RM1.39m due beyond 12 months. Offsetting this, it had RM69.1m in cash and RM24.1m in receivables that were due within 12 months. So it can boast RM4.59m more liquid assets than total liabilities.

This short term liquidity is a sign that AE Multi Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 you can't view debt in total isolation; since AE Multi Holdings Berhad will need earnings to service that debt. 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 saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is AE Multi Holdings Berhad?

While AE Multi Holdings Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM11m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 3 warning signs for AE Multi Holdings Berhad you should be aware of, and 2 of them make us uncomfortable.

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.