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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Acma Ltd. (SGX:AYV) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Acma
What Is Acma's Debt?
As you can see below, Acma had S$11.5m of debt at June 2019, down from S$12.9m a year prior. However, it also had S$5.03m in cash, and so its net debt is S$6.49m.
How Strong Is Acma's Balance Sheet?
The latest balance sheet data shows that Acma had liabilities of S$43.4m due within a year, and liabilities of S$1.86m falling due after that. Offsetting these obligations, it had cash of S$5.03m as well as receivables valued at S$32.8m due within 12 months. So its liabilities total S$7.33m more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's S$5.77m market capitalization, you might well be inclined to review the balance sheet, just like one might study a new partner's social media. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Acma's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Acma actually shrunk its revenue by 11%, to S$95m. That's not what we would hope to see.
Caveat Emptor
Not only did Acma's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping S$4.7m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of-S$6.4m. In the meantime, we consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Acma's profit, revenue, and operating cashflow have changed over the last few years.