Rock star Growth Puts AE Multi Holdings Berhad (KLSE:AEM) In A Position To Use Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, AE Multi Holdings Berhad (KLSE:AEM) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, 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.

Check out the opportunities and risks within the MY Electronic industry.

How Much Debt Does AE Multi Holdings Berhad Carry?

The image below, which you can click on for greater detail, shows that AE Multi Holdings Berhad had debt of RM34.5m at the end of June 2022, a reduction from RM39.1m over a year. But on the other hand it also has RM61.8m in cash, leading to a RM27.2m net cash position.

A Look At AE Multi Holdings Berhad's Liabilities

According to the last reported balance sheet, AE Multi Holdings Berhad had liabilities of RM84.3m due within 12 months, and liabilities of RM2.30m due beyond 12 months. Offsetting these obligations, it had cash of RM61.8m as well as receivables valued at RM44.1m due within 12 months. So it actually has RM19.3m more liquid assets than total liabilities.

This excess liquidity suggests that AE Multi Holdings Berhad is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, AE Multi Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since AE Multi Holdings Berhad will need earnings to service that debt. 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 RM136m, which is a gain of 62%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

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. And over the same period it saw negative free cash outflow of RM28m and booked a RM64m accounting loss. With only RM27.2m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, AE Multi Holdings Berhad may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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 example AE Multi Holdings Berhad has 4 warning signs (and 3 which don't sit too well with us) we think you should know about.

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.