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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Benalec Holdings Berhad (KLSE:BENALEC) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Benalec Holdings Berhad's Debt?
As you can see below, Benalec Holdings Berhad had RM93.5m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of RM25.1m, its net debt is less, at about RM68.4m.
How Strong Is Benalec Holdings Berhad's Balance Sheet?
We can see from the most recent balance sheet that Benalec Holdings Berhad had liabilities of RM98.4m falling due within a year, and liabilities of RM219.7m due beyond that. Offsetting this, it had RM25.1m in cash and RM98.6m in receivables that were due within 12 months. So its liabilities total RM194.3m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the RM127.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Benalec Holdings Berhad would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Benalec Holdings 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 Benalec Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 77%, to RM161m. With any luck the company will be able to grow its way to profitability.
Despite the top line growth, Benalec Holdings Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM46m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of RM68m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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 instance, we've identified 2 warning signs for Benalec Holdings Berhad (1 is a bit unpleasant) 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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