Stock Analysis

AEM Holdings (SGX:AWX) Seems To Use Debt Quite Sensibly

SGX:AWX
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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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that AEM Holdings Ltd (SGX:AWX) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for AEM Holdings

How Much Debt Does AEM Holdings Carry?

The image below, which you can click on for greater detail, shows that at December 2021 AEM Holdings had debt of S$63.3m, up from S$1.87m in one year. But it also has S$216.2m in cash to offset that, meaning it has S$152.9m net cash.

debt-equity-history-analysis
SGX:AWX Debt to Equity History March 7th 2022

A Look At AEM Holdings' Liabilities

The latest balance sheet data shows that AEM Holdings had liabilities of S$236.6m due within a year, and liabilities of S$71.3m falling due after that. On the other hand, it had cash of S$216.2m and S$128.6m worth of receivables due within a year. So it actually has S$36.8m more liquid assets than total liabilities.

This surplus suggests that AEM Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, AEM Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, AEM Holdings saw its EBIT drop by 5.0% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its 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 AEM Holdings 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 AEM Holdings 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. During the last three years, AEM Holdings produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case AEM Holdings has S$152.9m in net cash and a decent-looking balance sheet. So we don't have any problem with AEM Holdings's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for AEM Holdings (of which 1 is potentially serious!) you should know about.

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.

Valuation is complex, but we're helping make it simple.

Find out whether AEM Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.