Is Advance Synergy Berhad (KLSE:ASB) 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. As with many other companies Advance Synergy Berhad (KLSE:ASB) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See 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 Advance Synergy Berhad had debt of RM114.0m at the end of September 2024, a reduction from RM133.5m over a year. However, because it has a cash reserve of RM94.8m, its net debt is less, at about RM19.3m.

How Strong Is Advance Synergy Berhad's Balance Sheet?

The latest balance sheet data shows that Advance Synergy Berhad had liabilities of RM101.7m due within a year, and liabilities of RM102.7m falling due after that. Offsetting this, it had RM94.8m in cash and RM87.4m in receivables that were due within 12 months. So it has liabilities totalling RM22.3m more than its cash and near-term receivables, combined.

Given Advance Synergy Berhad has a market capitalization of RM202.3m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is Advance Synergy Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Advance Synergy Berhad made a loss at the EBIT level, and saw its revenue drop to RM263m, which is a fall of 13%. We would much prefer see growth.

Caveat Emptor

Not only did Advance Synergy Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM46m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 RM32m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Advance Synergy Berhad (at least 1 which is significant) , and understanding them should be part of your investment process.

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.