Here's Why Advance Synergy Berhad (KLSE:ASB) Can Manage Its Debt Responsibly

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.' 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, Advance Synergy Berhad (KLSE:ASB) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Advance Synergy Berhad

What Is Advance Synergy Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Advance Synergy Berhad had RM74.2m of debt in September 2020, down from RM143.6m, one year before. But on the other hand it also has RM99.8m in cash, leading to a RM25.5m net cash position.

How Healthy Is Advance Synergy Berhad's Balance Sheet?

The latest balance sheet data shows that Advance Synergy Berhad had liabilities of RM113.0m due within a year, and liabilities of RM106.7m falling due after that. Offsetting this, it had RM99.8m in cash and RM100.8m in receivables that were due within 12 months. So it has liabilities totalling RM19.0m more than its cash and near-term receivables, combined.

Since publicly traded Advance Synergy Berhad shares are worth a total of RM139.4m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Advance Synergy Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Advance Synergy Berhad grew its EBIT by 1,026% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Advance Synergy Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last two years, Advance Synergy Berhad actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While Advance Synergy Berhad does have more liabilities than liquid assets, it also has net cash of RM25.5m. And it impressed us with its EBIT growth of 1,026% over the last year. So we are not troubled with Advance Synergy Berhad's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Advance Synergy Berhad is showing 3 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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