Here’s why ATA IMS Berhad (KLSE:ATAIMS) has significant leverage

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that ATA IMS Berhad (KLSE:ATAIMS) has debt on its balance sheet. But does this debt worry shareholders?

Why is debt risky?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for ATA IMS Berhad

What is ATA IMS Berhad’s debt?

As you can see below, ATA IMS Berhad had a debt of RM212.2 million in December 2021, compared to RM384.8 million the previous year. However, he has RM238.0 million in cash to offset this, resulting in a net cash of RM25.8 million.

KLSE: ATAIMS Debt to Equity History March 15, 2022

How strong is ATA IMS Berhad’s balance sheet?

We can see from the most recent balance sheet that ATA IMS Berhad had liabilities of RM903.8m due within one year, and liabilities of RM171.2m due beyond. As compensation for these obligations, it had cash of RM238.0 million and receivables valued at RM677.0 million due within 12 months. Thus, its liabilities total RM160.0 million more than the combination of its cash and short-term receivables.

ATA IMS Berhad has a market capitalization of RM445.1 million, so it could very likely raise funds to improve its balance sheet, should the need arise. But we definitely want to keep our eyes peeled for indications that its debt is too risky. Despite its notable liabilities, ATA IMS Berhad has net cash, so it’s fair to say that it doesn’t have heavy debt!

Importantly, ATA IMS Berhad’s EBIT has fallen by 60% over the last twelve months. If this decline continues, it will be more difficult to repay debts than to sell foie gras at a vegan convention. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether ATA IMS Berhad can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a company can only repay its debts with cash, not book profits. ATA IMS Berhad may have net cash on the balance sheet, but it is always interesting to see the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its ability to manage debt. Over the past three years, ATA IMS Berhad has recorded free cash flow of 62% of its EBIT, which is about normal given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.

Abstract

Although ATA IMS Berhad has more liabilities than liquid assets, it also has a net cash position of RM25.8 million. So, even if we see areas for improvement, we are not too worried about the balance sheet of ATA IMS Berhad. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 4 warning signs for ATA IMS Berhad (including 2 a little unpleasant!) to know.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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