Is ATA IMS Berhad (KLSE:ATAIMS) Using Too Much 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. We note that ATA IMS Berhad (KLSE:ATAIMS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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.

See our latest analysis for ATA IMS Berhad

What Is ATA IMS Berhad's Debt?

As you can see below, ATA IMS Berhad had RM82.9m of debt at September 2022, down from RM451.7m a year prior. But on the other hand it also has RM273.3m in cash, leading to a RM190.4m net cash position.

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 RM282.8m falling due within a year, and liabilities of RM123.3m due beyond that. On the other hand, it had cash of RM273.3m and RM305.0m worth of receivables due within a year. So it actually has RM172.2m more liquid assets than total liabilities.

This surplus strongly suggests that ATA IMS Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, ATA IMS Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, ATA IMS Berhad made a loss at the EBIT level, and saw its revenue drop to RM1.7b, which is a fall of 53%. To be frank that doesn't bode well.

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 RM386m. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for ATA IMS Berhad you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.