Health Check: How Prudently Does Advance Synergy Berhad (KLSE:ASB) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Advance Synergy Berhad (KLSE:ASB) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Advance Synergy Berhad

How Much Debt Does Advance Synergy Berhad Carry?

The image below, which you can click on for greater detail, shows that at June 2021 Advance Synergy Berhad had debt of RM96.9m, up from RM53.8m in one year. However, it does have RM110.6m in cash offsetting this, leading to net cash of RM13.7m.

A Look At Advance Synergy Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Advance Synergy Berhad had liabilities of RM94.5m due within 12 months and liabilities of RM128.9m due beyond that. Offsetting these obligations, it had cash of RM110.6m as well as receivables valued at RM77.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM35.7m.

This deficit isn't so bad because Advance Synergy Berhad is worth RM111.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Advance Synergy Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Advance Synergy Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Advance Synergy Berhad had a loss before interest and tax, and actually shrunk its revenue by 52%, to RM100m. To be frank that doesn't bode well.

So How Risky Is Advance Synergy Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Advance Synergy Berhad had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through RM34m of cash and made a loss of RM32m. With only RM13.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Advance Synergy Berhad .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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