Is Scanwolf Corporation Berhad (KLSE:SCNWOLF) Using Debt In A Risky Way?

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.' 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. We can see that Scanwolf Corporation Berhad (KLSE:SCNWOLF) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Scanwolf Corporation Berhad

What Is Scanwolf Corporation Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that Scanwolf Corporation Berhad had RM28.7m in debt in September 2020; about the same as the year before. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is Scanwolf Corporation Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Scanwolf Corporation Berhad had liabilities of RM66.4m due within 12 months and liabilities of RM10.9m due beyond that. Offsetting this, it had RM480.0k in cash and RM5.35m in receivables that were due within 12 months. So it has liabilities totalling RM71.5m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM24.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Scanwolf Corporation Berhad would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Scanwolf Corporation Berhad will need earnings to service that debt. 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, Scanwolf Corporation Berhad made a loss at the EBIT level, and saw its revenue drop to RM31m, which is a fall of 34%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Scanwolf 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 RM20m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost RM11m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Scanwolf Corporation Berhad (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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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