Is CN Asia Corporation Bhd (KLSE:CNASIA) Weighed On By Its Debt Load?

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. As with many other companies CN Asia Corporation Bhd (KLSE:CNASIA) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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.

Check out our latest analysis for CN Asia Corporation Bhd

How Much Debt Does CN Asia Corporation Bhd Carry?

As you can see below, at the end of June 2022, CN Asia Corporation Bhd had RM8.98m of debt, up from RM5.82m a year ago. Click the image for more detail. But on the other hand it also has RM12.5m in cash, leading to a RM3.56m net cash position.

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

According to the last reported balance sheet, CN Asia Corporation Bhd had liabilities of RM8.50m due within 12 months, and liabilities of RM3.74m due beyond 12 months. On the other hand, it had cash of RM12.5m and RM14.7m worth of receivables due within a year. So it can boast RM15.0m more liquid assets than total liabilities.

This surplus strongly suggests that CN Asia Corporation Bhd has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, CN Asia Corporation Bhd boasts net cash, so it's fair to say it does not have a heavy debt load! 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, CN Asia Corporation Bhd made a loss at the EBIT level, and saw its revenue drop to RM11m, which is a fall of 26%. That makes us nervous, to say the least.

So How Risky Is CN Asia Corporation Bhd?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months CN Asia Corporation Bhd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM12m and booked a RM14m accounting loss. Given it only has net cash of RM3.56m, the company may need to raise more capital if it doesn't reach break-even 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 5 warning signs we've spotted with CN Asia Corporation Bhd (including 3 which shouldn't be ignored) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.