Is Berjaya Corporation Berhad (KLSE:BJCORP) 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. Importantly, Berjaya Corporation Berhad (KLSE:BJCORP) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Berjaya Corporation Berhad

How Much Debt Does Berjaya Corporation Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Berjaya Corporation Berhad had RM5.07b of debt in December 2020, down from RM5.32b, one year before. However, because it has a cash reserve of RM1.54b, its net debt is less, at about RM3.53b.

How Healthy Is Berjaya Corporation Berhad's Balance Sheet?

The latest balance sheet data shows that Berjaya Corporation Berhad had liabilities of RM5.29b due within a year, and liabilities of RM6.20b falling due after that. Offsetting this, it had RM1.54b in cash and RM2.22b in receivables that were due within 12 months. So it has liabilities totalling RM7.73b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM1.98b 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, Berjaya Corporation 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 you can't view debt in total isolation; since Berjaya Corporation 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.

In the last year Berjaya Corporation Berhad had a loss before interest and tax, and actually shrunk its revenue by 13%, to RM6.7b. That's not what we would hope to see.

Caveat Emptor

Not only did Berjaya Corporation Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM225m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost RM31m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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. Be aware that Berjaya Corporation Berhad is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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