Is CN Asia Corporation Bhd (KLSE:CNASIA) 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 can see that CN Asia Corporation Bhd (KLSE:CNASIA) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for CN Asia Corporation Bhd

How Much Debt Does CN Asia Corporation Bhd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 CN Asia Corporation Bhd had RM10.4m of debt, an increase on RM5.39m, over one year. However, it does have RM12.4m in cash offsetting this, leading to net cash of RM1.98m.

How Strong Is CN Asia Corporation Bhd's Balance Sheet?

We can see from the most recent balance sheet that CN Asia Corporation Bhd had liabilities of RM10.1m falling due within a year, and liabilities of RM3.61m due beyond that. Offsetting these obligations, it had cash of RM12.4m as well as receivables valued at RM16.1m due within 12 months. So it can boast RM14.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that CN Asia Corporation Bhd's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that CN Asia Corporation Bhd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CN Asia Corporation Bhd's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, CN Asia Corporation Bhd reported revenue of RM12m, which is a gain of 13%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is CN Asia Corporation Bhd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that CN Asia Corporation Bhd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through RM6.0m of cash and made a loss of RM18m. With only RM1.98m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 CN Asia Corporation Bhd has 4 warning signs (and 1 which is significant) we think you should know about.

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. 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.