Does Aurelius Technologies Berhad (KLSE:ATECH) Have A Healthy Balance Sheet?

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.' 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. We note that Aurelius Technologies Berhad (KLSE:ATECH) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Aurelius Technologies Berhad

What Is Aurelius Technologies Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Aurelius Technologies Berhad had debt of RM21.7m at the end of December 2023, a reduction from RM93.5m over a year. However, it does have RM89.4m in cash offsetting this, leading to net cash of RM67.7m.

How Healthy Is Aurelius Technologies Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aurelius Technologies Berhad had liabilities of RM127.4m due within 12 months and liabilities of RM29.5m due beyond that. Offsetting these obligations, it had cash of RM89.4m as well as receivables valued at RM119.7m due within 12 months. So it actually has RM52.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Aurelius Technologies Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Aurelius Technologies Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Aurelius Technologies Berhad grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Aurelius Technologies 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. While Aurelius Technologies Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Aurelius Technologies Berhad's free cash flow amounted to 21% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Aurelius Technologies Berhad has RM67.7m in net cash and a decent-looking balance sheet. And we liked the look of last year's 21% year-on-year EBIT growth. So is Aurelius Technologies Berhad's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Aurelius Technologies Berhad's earnings per share history for free.

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.