We Think AE Multi Holdings Berhad (KLSE:AEM) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, AE Multi Holdings Berhad (KLSE:AEM) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 2022, AE Multi Holdings Berhad had RM44.6m of debt, up from RM39.8m a year ago. Click the image for more detail. However, it also had RM40.3m in cash, and so its net debt is RM4.37m.

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 RM86.7m due within 12 months and liabilities of RM1.88m due beyond that. Offsetting these obligations, it had cash of RM40.3m as well as receivables valued at RM41.8m due within 12 months. So its liabilities total RM6.58m more than the combination of its cash and short-term receivables.

Given AE Multi Holdings Berhad has a market capitalization of RM54.1m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 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 RM111m, which is a fall of 9.3%. That's not what we would hope to see.

Caveat Emptor

Importantly, AE Multi Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM31m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM23m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that AE Multi Holdings Berhad is showing 3 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.