We recently reviewed a company that had embarked on an unusually aggressive expansion of its business.

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Companies, of course, need to use their available capital wisely and expand when they can. But investors need to track such expansion plans closely and be especially vigilant when there are several expansions simultaneously in progress, or at least within a very short time.

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The company we reviewed began expanding by acquiring a 51% stake in another company for RM350.1mil. The latter later became its subsidiary and, by the first quarter of 2011, produced a quarterly profit before tax of RM50mil.

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If this subsidiary continues performing like so, the acquisition would be fruitful such that the company's 51% stake would yield a return on investment before tax of 29.1% annually.

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However, the company is now faced with employee union problems, and contracts awarded to relatives that have led to stretched operational headaches which can't easily be changed or terminated.

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In that same 2011 quarter, the company's management also paid RM650mil to control 37% of a third company which, in turn, owns 90% of a Laos-incorporated company.

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The management's rationale for such an acquisition was to broaden their manufacturing capabilities. However, this investment has so far yielded effective control of only 33.3%. Plus, the Laos vehicle has yet to start up its factory.

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The management in question explained that the plant in Laos is almost ready to run and is only waiting for a step-down transformer to be shipped from Japan. The shipping was delayed by the March 2011 earthquake cum tsunami that ripped up much of Japan's economic landscape and so the management has been unable to pin down firmly the date of delivery.

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Allowing for that uncertainty, the RM650mil payment for what is effectively a 33.3% stake in an overseas plant that is not operating yet seems to suggest that the plant's net asset value (NAV) is RM1.95bil.

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But when we scanned through the company's most recent annual report, it had reported the plant's NAV as being RM1.7bil, with a net loss for 2010. This means that the company had bought the plant well above its NAV. We can only wonder why the management decided to pay such a premium for a non operational plant.

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Hindsight is, of course, 20/20 but even so, investing all these funds in these overseas plants is huge when you consider that the company under review had overall fixed assets of only RM1.6bil at the end of 2009, while its net book value stood at RM940mil.

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With that in mind, and given that the Laos plant has enormous capacity, we asked the company's management whether or not it would be able to sell everything that the plant produced. They replied that the Indo-China market alone would be able to absorb most of the plant's output because there are only four other major manufacturers there, compared to six in Thailand.

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Nevertheless, it seems rather odd that the management has spent such a lot when the plant has not produced anything yet. It would ordinarily be more prudent for a company to expand cautiously and ratchet up the investment when sales grow. After all, we are still puzzled with the need to hurry?

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On top of this aggressive move, the company has also bought more industrial land in a neighbouring nation for RM180mil. This land is about 200km away from its existing factory there.

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When we queried its management, it explained that it wants to build a factory on the newly-acquired land as an “all-in” capital investment of RM1bil. It plans to complete the construction of this new factory by 2012 and have operations in full swing by 2013. To do all that, it is now expected to borrow RM350mil.

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Having learnt all this, our sense is that the company is hurtling ahead too ambitiously for comfort. Things often do not go as smoothly as planned, especially in the increasingly uncertain world confronting us today; what with much of the West buckling under massive debt and slowing growth prospects.

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For one thing, if the company's go-go-go strategy pays off, it will do extremely well. But with more aggression comes more risk. The main concern is whether or not its targeted markets can indeed absorb all its ambitious capacity within the short time that it has to show investors results.

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Another prime concern is that this company has used all of its high cash reserves to splash out on investments that will likely take a long time to show returns.

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For almost three years, this company was sitting on at least RM1bil cash, but in mid-2010, its management unleashed a fierce strategy and within two quarters, has spent all that cash and, indeed, is now, at a stroke of a pen, incurring debt.

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The company's shareholders cannot do much now, as the management was, with its control, able to make such aggressive acquisitions. We do, however, have to ask whether the management has made the best use of its cash reserves and it will be interesting to see how its business expansion plays out against the net debt with which it is now saddled.