Is Crest Builder Holdings Berhad (KLSE:CRESBLD) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Crest Builder Holdings Berhad (KLSE:CRESBLD) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Crest Builder Holdings Berhad

How Much Debt Does Crest Builder Holdings Berhad Carry?

The chart below, which you can click on for greater detail, shows that Crest Builder Holdings Berhad had RM542.7m in debt in March 2021; about the same as the year before. However, because it has a cash reserve of RM90.1m, its net debt is less, at about RM452.7m.

How Strong Is Crest Builder Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Crest Builder Holdings Berhad had liabilities of RM556.5m due within 12 months and liabilities of RM415.2m due beyond that. On the other hand, it had cash of RM90.1m and RM282.3m worth of receivables due within a year. So it has liabilities totalling RM599.3m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM97.3m 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, Crest Builder Holdings Berhad would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Crest Builder Holdings Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Crest Builder Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 14%, to RM311m. That's not what we would hope to see.

Caveat Emptor

Not only did Crest Builder Holdings Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM26m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost RM81m in the last year. So we think buying this stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Crest Builder Holdings Berhad has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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