Is AEI (SGX:AWG) Weighed On By Its Debt Load?

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, AEI Corporation Ltd. (SGX:AWG) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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.

Check out our latest analysis for AEI

What Is AEI's Debt?

As you can see below, at the end of December 2020, AEI had S$3.68m of debt, up from S$3.37m a year ago. Click the image for more detail. But on the other hand it also has S$29.7m in cash, leading to a S$26.0m net cash position.

A Look At AEI's Liabilities

According to the last reported balance sheet, AEI had liabilities of S$13.8m due within 12 months, and liabilities of S$1.99m due beyond 12 months. On the other hand, it had cash of S$29.7m and S$1.99m worth of receivables due within a year. So it can boast S$16.0m more liquid assets than total liabilities.

This excess liquidity suggests that AEI is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that AEI 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 you can't view debt in total isolation; since AEI will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, AEI reported revenue of S$9.9m, which is a gain of 8.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is AEI?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months AEI lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through S$4.4m of cash and made a loss of S$5.6m. But the saving grace is the S$26.0m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for AEI (of which 2 shouldn't be ignored!) 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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