Is Ipmuda Berhad (KLSE:IPMUDA) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Ipmuda Berhad (KLSE:IPMUDA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

What Is Ipmuda Berhad's Debt?

The image below, which you can click on for greater detail, shows that Ipmuda Berhad had debt of RM59.3m at the end of September 2020, a reduction from RM80.6m over a year. However, because it has a cash reserve of RM5.91m, its net debt is less, at about RM53.4m.

How Strong Is Ipmuda Berhad's Balance Sheet?

The latest balance sheet data shows that Ipmuda Berhad had liabilities of RM73.6m due within a year, and liabilities of RM9.12m falling due after that. On the other hand, it had cash of RM5.91m and RM25.0m worth of receivables due within a year. So it has liabilities totalling RM51.8m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of RM63.7m, so it does suggest shareholders should keep an eye on Ipmuda Berhad's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Ipmuda Berhad made a loss at the EBIT level, and saw its revenue drop to RM63m, which is a fall of 40%. To be frank that doesn't bode well.

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 RM26m. 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. However, it doesn't help that it burned through RM3.4m of cash over the last year. So in short it's a really risky stock. 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 Ipmuda Berhad is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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