Health Check: How Prudently Does ATA IMS Berhad (KLSE:ATAIMS) Use Debt?

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.' 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. Importantly, ATA IMS Berhad (KLSE:ATAIMS) does carry debt. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is ATA IMS Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that ATA IMS Berhad had debt of RM57.3m at the end of December 2024, a reduction from RM66.4m over a year. But on the other hand it also has RM216.0m in cash, leading to a RM158.7m 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 RM169.4m due within 12 months and liabilities of RM48.0m due beyond that. Offsetting these obligations, it had cash of RM216.0m as well as receivables valued at RM157.6m due within 12 months. So it can boast RM156.2m 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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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. 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 ATA IMS 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.

Check out our latest analysis for ATA IMS Berhad

In the last year ATA IMS Berhad had a loss before interest and tax, and actually shrunk its revenue by 35%, to RM278m. That makes us nervous, to say the least.

So How Risky Is ATA IMS Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year ATA IMS Berhad had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through RM14m of cash and made a loss of RM95m. While this does make the company a bit risky, it's important to remember it has net cash of RM158.7m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example ATA IMS Berhad has 2 warning signs (and 1 which is concerning) we think you should know about.

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.