Is Advancecon Holdings Berhad (KLSE:ADVCON) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Advancecon Holdings Berhad (KLSE:ADVCON) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Advancecon Holdings Berhad

How Much Debt Does Advancecon Holdings Berhad Carry?

As you can see below, Advancecon Holdings Berhad had RM173.7m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM18.3m in cash offsetting this, leading to net debt of about RM155.4m.

A Look At Advancecon Holdings Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Advancecon Holdings Berhad had liabilities of RM327.4m due within 12 months and liabilities of RM59.9m due beyond that. Offsetting these obligations, it had cash of RM18.3m as well as receivables valued at RM280.8m due within 12 months. So its liabilities total RM88.3m more than the combination of its cash and short-term receivables.

Advancecon Holdings Berhad has a market capitalization of RM187.0m, 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 it is future earnings, more than anything, that will determine Advancecon Holdings Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Advancecon Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to RM449m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Advancecon Holdings Berhad managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at RM3.1m. 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 RM6.0m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Advancecon Holdings Berhad (of which 1 is a bit unpleasant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.