Here's Why ATA IMS Berhad (KLSE:ATAIMS) Has A Meaningful Debt Burden

Simply Wall St
March 15, 2022
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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that ATA IMS Berhad (KLSE:ATAIMS) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Debt?

As you can see below, ATA IMS Berhad had RM212.2m of debt at December 2021, down from RM384.8m a year prior. However, it does have RM238.0m in cash offsetting this, leading to net cash of RM25.8m.

KLSE:ATAIMS Debt to Equity History March 15th 2022

How Strong Is ATA IMS Berhad's Balance Sheet?

We can see from the most recent balance sheet that ATA IMS Berhad had liabilities of RM903.8m falling due within a year, and liabilities of RM171.2m due beyond that. Offsetting these obligations, it had cash of RM238.0m as well as receivables valued at RM677.0m due within 12 months. So its liabilities total RM160.0m more than the combination of its cash and short-term receivables.

ATA IMS Berhad has a market capitalization of RM445.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, ATA IMS Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, ATA IMS Berhad's EBIT fell a jaw-dropping 60% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. ATA IMS Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, ATA IMS Berhad recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While ATA IMS Berhad does have more liabilities than liquid assets, it also has net cash of RM25.8m. So although we see some areas for improvement, we're not too worried about ATA IMS Berhad's balance sheet. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for ATA IMS Berhad (of which 2 are a bit unpleasant!) 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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