David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 AWC Berhad (KLSE:AWC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for AWC Berhad
What Is AWC Berhad's Debt?
The image below, which you can click on for greater detail, shows that AWC Berhad had debt of RM28.0m at the end of September 2020, a reduction from RM33.8m over a year. But it also has RM96.7m in cash to offset that, meaning it has RM68.8m net cash.
How Strong Is AWC Berhad's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that AWC Berhad had liabilities of RM108.0m due within 12 months and liabilities of RM20.6m due beyond that. On the other hand, it had cash of RM96.7m and RM167.4m worth of receivables due within a year. So it can boast RM135.5m more liquid assets than total liabilities.
This excess liquidity is a great indication that AWC Berhad's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that AWC Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if AWC Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year AWC Berhad had a loss before interest and tax, and actually shrunk its revenue by 14%, to RM302m. That's not what we would hope to see.
So How Risky Is AWC Berhad?
While AWC Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM36m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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. Case in point: We've spotted 2 warning signs for AWC Berhad you should be aware of.
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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About KLSE:AWC
AWC Berhad
An investment holding company, provides integrated facilities management and engineering services.
Solid track record with excellent balance sheet.
