ATA IMS Berhad (KLSE:ATAIMS) Has Debt But No Earnings; Should You Worry?

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.' 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. We can see that ATA IMS Berhad (KLSE:ATAIMS) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ATA IMS Berhad

How Much Debt Does ATA IMS Berhad Carry?

As you can see below, ATA IMS Berhad had RM84.3m of debt at December 2022, down from RM212.2m a year prior. But on the other hand it also has RM256.7m in cash, leading to a RM172.4m net cash position.

A Look At ATA IMS Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that ATA IMS Berhad had liabilities of RM245.5m due within 12 months and liabilities of RM114.3m due beyond that. Offsetting these obligations, it had cash of RM256.7m as well as receivables valued at RM282.9m due within 12 months. So it actually has RM179.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that ATA IMS Berhad's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that ATA IMS Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ATA IMS Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year ATA IMS Berhad had a loss before interest and tax, and actually shrunk its revenue by 61%, to RM1.2b. To be frank that doesn't bode well.

So How Risky Is ATA IMS Berhad?

Although ATA IMS Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM164m. 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. The next few years will be important as the business matures. 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. We've identified 2 warning signs with ATA IMS Berhad , and understanding them should be part of your investment process.

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.