Here's Why Advancecon Holdings Berhad (KLSE:ADVCON) Can Afford Some Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Advancecon Holdings Berhad (KLSE:ADVCON) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Advancecon Holdings Berhad

How Much Debt Does Advancecon Holdings Berhad Carry?

As you can see below, Advancecon Holdings Berhad had RM171.9m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has RM8.70m in cash leading to net debt of about RM163.2m.

How Healthy Is Advancecon Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Advancecon Holdings Berhad had liabilities of RM314.9m falling due within a year, and liabilities of RM66.0m due beyond that. Offsetting these obligations, it had cash of RM8.70m as well as receivables valued at RM266.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM106.1m.

Advancecon Holdings Berhad has a market capitalization of RM210.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Advancecon Holdings Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Advancecon Holdings Berhad reported revenue of RM429m, which is a gain of 38%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Advancecon Holdings Berhad's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost RM8.8m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through RM18m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Advancecon Holdings Berhad (1 makes us a bit uncomfortable) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.