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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Ipmuda Berhad (KLSE:IPMUDA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Ipmuda Berhad
How Much Debt Does Ipmuda Berhad Carry?
As you can see below, Ipmuda Berhad had RM57.5m of debt at December 2020, down from RM74.8m a year prior. On the flip side, it has RM9.87m in cash leading to net debt of about RM47.6m.
How Healthy Is Ipmuda Berhad's Balance Sheet?
The latest balance sheet data shows that Ipmuda Berhad had liabilities of RM44.7m due within a year, and liabilities of RM36.3m falling due after that. On the other hand, it had cash of RM9.87m and RM23.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM48.0m.
This deficit isn't so bad because Ipmuda Berhad is worth RM121.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Ipmuda Berhad'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.
In the last year Ipmuda Berhad had a loss before interest and tax, and actually shrunk its revenue by 69%, to RM36m. That makes us nervous, to say the least.
Caveat Emptor
While Ipmuda Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping RM24m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of RM22m. So we do think this stock is quite 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Ipmuda Berhad (of which 1 is concerning!) you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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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About KLSE:JSB
Jentayu Sustainables Berhad
An investment holding company, engages in trading and distribution of building materials, and other products in Malaysia.
Moderate with adequate balance sheet.
