Health Check: How Prudently Does Ireka Corporation Berhad (KLSE:IREKA) Use Debt?

Warren Buffett famously said, '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 Ireka Corporation Berhad (KLSE:IREKA) makes use of debt. But should shareholders be worried about its use of debt?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Ireka Corporation Berhad

What Is Ireka Corporation Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Ireka Corporation Berhad had debt of RM109.7m at the end of December 2020, a reduction from RM129.9m over a year. On the flip side, it has RM26.5m in cash leading to net debt of about RM83.2m.

How Healthy Is Ireka Corporation Berhad's Balance Sheet?

According to the last reported balance sheet, Ireka Corporation Berhad had liabilities of RM364.3m due within 12 months, and liabilities of RM27.1m due beyond 12 months. Offsetting this, it had RM26.5m in cash and RM195.6m in receivables that were due within 12 months. So its liabilities total RM169.3m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the RM111.1m 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. After all, Ireka Corporation Berhad would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ireka Corporation Berhad 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 Ireka Corporation Berhad had a loss before interest and tax, and actually shrunk its revenue by 25%, to RM122m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Ireka Corporation 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 RM13m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of RM48m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. Be aware that Ireka Corporation Berhad is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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. 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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