Is Benalec Holdings Berhad (KLSE:BENALEC) 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.' 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 Benalec Holdings Berhad (KLSE:BENALEC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Benalec Holdings Berhad Carry?

As you can see below, Benalec Holdings Berhad had RM30.4m of debt at December 2024, down from RM53.2m a year prior. However, it does have RM859.0k in cash offsetting this, leading to net debt of about RM29.5m.

How Healthy Is Benalec Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Benalec Holdings Berhad had liabilities of RM119.6m due within 12 months and liabilities of RM130.3m due beyond that. On the other hand, it had cash of RM859.0k and RM48.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM201.0m.

This deficit casts a shadow over the RM91.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Benalec Holdings Berhad would likely require a major re-capitalisation if it had to pay its creditors today.

View our latest analysis for Benalec Holdings Berhad

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Looking at its net debt to EBITDA of 1.5 and interest cover of 3.7 times, it seems to us that Benalec Holdings Berhad is probably using debt in a pretty reasonable way. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. We also note that Benalec Holdings Berhad improved its EBIT from a last year's loss to a positive RM18m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Benalec Holdings Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend .

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Benalec Holdings Berhad actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Mulling over Benalec Holdings Berhad's attempt at staying on top of its total liabilities, we're certainly not enthusiastic. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. Once we consider all the factors above, together, it seems to us that Benalec Holdings Berhad's debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Benalec Holdings Berhad has 2 warning signs we think you should be aware of.

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.