Is AEI (SGX:AWG) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies AEI Corporation Ltd. (SGX:AWG) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, 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 AEI

What Is AEI's Net Debt?

You can click the graphic below for the historical numbers, but it shows that AEI had S$2.07m of debt in June 2021, down from S$2.25m, one year before. But it also has S$74.1m in cash to offset that, meaning it has S$72.1m net cash.

A Look At AEI's Liabilities

According to the last reported balance sheet, AEI had liabilities of S$6.22m due within 12 months, and liabilities of S$2.33m due beyond 12 months. On the other hand, it had cash of S$74.1m and S$6.28m worth of receivables due within a year. So it can boast S$71.8m more liquid assets than total liabilities.

This luscious liquidity implies that AEI'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. Succinctly put, AEI boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is AEI'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 AEI wasn't profitable at an EBIT level, but managed to grow its revenue by 59%, to S$14m. With any luck the company will be able to grow its way to profitability.

So How Risky Is AEI?

While AEI lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of S$12m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Given it also grew revenue by 59% over the last year, we think there's a good chance the company is on track. So this may well be an interesting business to watch grow. 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, we've discovered 4 warning signs for AEI (2 are a bit unpleasant!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.