Here's Why Scanwolf Corporation Berhad (KLSE:SCNWOLF) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Scanwolf Corporation Berhad (KLSE:SCNWOLF) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for Scanwolf Corporation Berhad

What Is Scanwolf Corporation Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Scanwolf Corporation Berhad had RM22.0m of debt in March 2022, down from RM27.9m, one year before. Net debt is about the same, since the it doesn't have much cash.

A Look At Scanwolf Corporation Berhad's Liabilities

We can see from the most recent balance sheet that Scanwolf Corporation Berhad had liabilities of RM39.9m falling due within a year, and liabilities of RM6.44m due beyond that. Offsetting these obligations, it had cash of RM325.0k as well as receivables valued at RM8.08m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM38.0m.

This deficit isn't so bad because Scanwolf Corporation Berhad is worth RM133.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Scanwolf Corporation Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Scanwolf Corporation Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to RM45m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Scanwolf Corporation Berhad's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at RM13m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through RM26m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Scanwolf Corporation Berhad is showing 5 warning signs in our investment analysis , and 3 of those are concerning...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.