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 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. We note that BCM Alliance Berhad (KLSE:BCMALL) 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?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, 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.
What Is BCM Alliance Berhad's Debt?
The image below, which you can click on for greater detail, shows that at September 2021 BCM Alliance Berhad had debt of RM10.8m, up from RM5.81m in one year. But on the other hand it also has RM104.2m in cash, leading to a RM93.5m net cash position.
How Strong Is BCM Alliance Berhad's Balance Sheet?
We can see from the most recent balance sheet that BCM Alliance Berhad had liabilities of RM15.7m falling due within a year, and liabilities of RM8.59m due beyond that. On the other hand, it had cash of RM104.2m and RM25.6m worth of receivables due within a year. So it actually has RM105.6m more liquid assets than total liabilities.
This surplus liquidity suggests that BCM Alliance Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, BCM Alliance Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!
Importantly, BCM Alliance Berhad's EBIT fell a jaw-dropping 95% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is BCM Alliance 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. BCM Alliance 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. During the last three years, BCM Alliance Berhad burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
While it is always sensible to investigate a company's debt, in this case BCM Alliance Berhad has RM93.5m in net cash and a strong balance sheet. So although we see some areas for improvement, we're not too worried about BCM Alliance Berhad's balance sheet. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for BCM Alliance Berhad (of which 2 shouldn't be ignored!) you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.