Is Advance Synergy Berhad (KLSE:ASB) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Advance Synergy Berhad (KLSE:ASB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

View 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 December 2020 Advance Synergy Berhad had debt of RM57.5m, up from RM48.8m in one year. But it also has RM103.0m in cash to offset that, meaning it has RM45.5m net cash.

How Healthy Is Advance Synergy Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Advance Synergy Berhad had liabilities of RM83.9m due within 12 months and liabilities of RM103.6m due beyond that. Offsetting this, it had RM103.0m in cash and RM59.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM24.8m.

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. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Advance Synergy Berhad had a loss before interest and tax, and actually shrunk its revenue by 57%, to RM117m. To be frank that doesn't bode well.

So How Risky Is Advance Synergy Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Advance Synergy Berhad had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through RM15m of cash and made a loss of RM34m. With only RM45.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Advance Synergy Berhad that you should be aware of before investing here.

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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This article by Simply Wall St is general in nature. 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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