Is ATA IMS Berhad (KLSE:ATAIMS) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, ATA IMS Berhad (KLSE:ATAIMS) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for ATA IMS Berhad

What Is ATA IMS Berhad's Debt?

The image below, which you can click on for greater detail, shows that ATA IMS Berhad had debt of RM54.2m at the end of September 2024, a reduction from RM65.5m over a year. But it also has RM221.8m in cash to offset that, meaning it has RM167.6m net cash.

How Strong Is ATA IMS Berhad's Balance Sheet?

The latest balance sheet data shows that ATA IMS Berhad had liabilities of RM137.1m due within a year, and liabilities of RM53.3m falling due after that. On the other hand, it had cash of RM221.8m and RM124.6m worth of receivables due within a year. So it actually has RM156.0m more liquid assets than total liabilities.

This luscious liquidity implies that ATA IMS Berhad's balance sheet is sturdy like a giant sequoia tree. 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. There's no doubt that we learn most about debt from the balance sheet. But it is ATA IMS Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year ATA IMS Berhad had a loss before interest and tax, and actually shrunk its revenue by 39%, to RM309m. To be frank that doesn't bode well.

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 RM5.1m of cash and made a loss of RM105m. But the saving grace is the RM167.6m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 2 warning signs with ATA IMS Berhad (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.