Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that AwanBiru Berhad Technology (KLSE: AWANTEC) uses debt in its business. But should shareholders worry about its use of debt?
When is debt dangerous?
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. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for AwanBiru Technology Berhad
What is AwanBiru Technology Berhad’s net debt?
As you can see below, AwanBiru Technology Berhad had a debt of RM22.4 million in December 2021, compared to RM49.7 million the previous year. But he also has RM32.0m in cash to make up for that, meaning he has a net cash of RM9.62m.
How healthy is AwanBiru Technology Berhad’s balance sheet?
According to the latest published balance sheet, AwanBiru Technology Berhad had liabilities of RM216.2 million due within 12 months and liabilities of RM35.4 million due beyond 12 months. On the other hand, it had liquid assets of RM32.0 million and RM367.0 million of receivables due within the year. So he actually has RM147.4 million Continued liquid assets than total liabilities.
This excess liquidity suggests that AwanBiru Technology Berhad’s balance sheet could take a hit as well as Homer Simpson’s head can take a hit. Given this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that AwanBiru Technology Berhad has more cash than debt is arguably a good indication that it can safely manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine AwanBiru Technology Berhad’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Over the past year, AwanBiru Technology Berhad recorded a loss before interest and tax and actually reduced its revenue by 40% to RM96 million. To be honest, that doesn’t bode well.
So, how risky is AwanBiru technology?
While AwanBiru Technology Berhad lost money in earnings before interest and tax (EBIT), it actually recorded a paper profit of RM4.6 million. So taking that at face value, and considering the money, we don’t think it’s very risky in the short term. We will feel more comfortable with the stock once EBIT is positive, given the weak revenue growth. 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. Know that AwanBiru Technology Berhad shows 1 warning sign in our investment analysis you should know…
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.