Health Check: How Prudently Does ATA IMS Berhad (KLSE:ATAIMS) 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.' 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 ATA IMS Berhad (KLSE:ATAIMS) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for ATA IMS Berhad

What Is ATA IMS Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that ATA IMS Berhad had RM129.8m of debt in March 2022, down from RM458.8m, one year before. However, its balance sheet shows it holds RM209.0m in cash, so it actually has RM79.2m net cash.

How Strong Is ATA IMS Berhad's Balance Sheet?

The latest balance sheet data shows that ATA IMS Berhad had liabilities of RM585.0m due within a year, and liabilities of RM148.3m falling due after that. On the other hand, it had cash of RM209.0m and RM489.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM34.9m.

Of course, ATA IMS Berhad has a market capitalization of RM372.9m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, ATA IMS Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ATA IMS Berhad can strengthen its balance sheet over time. 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 38%, to RM2.6b. That makes us nervous, to say the least.

So How Risky Is ATA IMS Berhad?

While ATA IMS Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM223m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with ATA IMS Berhad (including 1 which is concerning) .

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.