Is Scanwolf Corporation Berhad (KLSE:SCNWOLF) A Risky Investment?

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 can see that Scanwolf Corporation Berhad (KLSE:SCNWOLF) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Scanwolf Corporation Berhad

What Is Scanwolf Corporation Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Scanwolf Corporation Berhad had RM18.1m of debt in December 2022, down from RM23.4m, one year before. On the flip side, it has RM619.0k in cash leading to net debt of about RM17.4m.

How Healthy Is Scanwolf Corporation Berhad's Balance Sheet?

According to the last reported balance sheet, Scanwolf Corporation Berhad had liabilities of RM37.9m due within 12 months, and liabilities of RM7.27m due beyond 12 months. Offsetting these obligations, it had cash of RM619.0k as well as receivables valued at RM9.08m due within 12 months. So its liabilities total RM35.4m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Scanwolf Corporation Berhad is worth RM88.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 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 Scanwolf Corporation Berhad's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Scanwolf Corporation Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM13m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 RM11m 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. 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 3 warning signs for Scanwolf Corporation Berhad (of which 2 can't be ignored!) you should know about.

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. 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.