Is CN Asia Corporation Bhd (KLSE:CNASIA) Using Too Much Debt?

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 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. As with many other companies CN Asia Corporation Bhd (KLSE:CNASIA) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for CN Asia Corporation Bhd

What Is CN Asia Corporation Bhd's Debt?

As you can see below, at the end of March 2022, CN Asia Corporation Bhd had RM8.09m of debt, up from RM2.51m a year ago. Click the image for more detail. But on the other hand it also has RM12.5m in cash, leading to a RM4.46m net cash position.

A Look At CN Asia Corporation Bhd's Liabilities

According to the last reported balance sheet, CN Asia Corporation Bhd had liabilities of RM7.34m due within 12 months, and liabilities of RM3.86m due beyond 12 months. Offsetting this, it had RM12.5m in cash and RM22.6m in receivables that were due within 12 months. So it can boast RM24.0m more liquid assets than total liabilities.

This luscious liquidity implies that CN Asia Corporation Bhd's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CN Asia Corporation Bhd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year CN Asia Corporation Bhd had a loss before interest and tax, and actually shrunk its revenue by 28%, to RM11m. To be frank that doesn't bode well.

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 RM25m of cash and made a loss of RM13m. Given it only has net cash of RM4.46m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that CN Asia Corporation Bhd is showing 5 warning signs in our investment analysis , and 1 of those can't be ignored...

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.