We Think Ireka Corporation Berhad (KLSE:IREKA) Has A Fair Chunk Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Ireka Corporation Berhad (KLSE:IREKA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Ireka Corporation Berhad

What Is Ireka Corporation Berhad's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Ireka Corporation Berhad had debt of RM80.4m, up from RM71.0m in one year. However, because it has a cash reserve of RM3.74m, its net debt is less, at about RM76.7m.

A Look At Ireka Corporation Berhad's Liabilities

The latest balance sheet data shows that Ireka Corporation Berhad had liabilities of RM101.6m due within a year, and liabilities of RM74.9m falling due after that. Offsetting this, it had RM3.74m in cash and RM76.7m in receivables that were due within 12 months. So its liabilities total RM96.1m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of RM132.1m, so it does suggest shareholders should keep an eye on Ireka Corporation Berhad's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Ireka Corporation 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, Ireka Corporation Berhad made a loss at the EBIT level, and saw its revenue drop to RM105m, which is a fall of 30%. 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). Its EBIT loss was a whopping RM116m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM31m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Ireka Corporation Berhad (1 shouldn't be ignored) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.