Scanwolf Corporation Berhad (KLSE:SCNWOLF) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Scanwolf Corporation Berhad (KLSE:SCNWOLF) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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 Scanwolf Corporation Berhad

What Is Scanwolf Corporation Berhad's Net Debt?

As you can see below, Scanwolf Corporation Berhad had RM22.7m of debt at December 2021, down from RM28.6m a year prior. And it doesn't have much cash, so its net debt is about the same.

A Look At Scanwolf Corporation Berhad's Liabilities

The latest balance sheet data shows that Scanwolf Corporation Berhad had liabilities of RM42.1m due within a year, and liabilities of RM8.81m falling due after that. On the other hand, it had cash of RM323.0k and RM7.43m worth of receivables due within a year. So its liabilities total RM43.2m more than the combination of its cash and short-term receivables.

Scanwolf Corporation Berhad has a market capitalization of RM105.4m, so it could very likely raise cash to ameliorate 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 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to RM44m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Scanwolf Corporation Berhad managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at RM4.2m. 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. Another cause for caution is that is bled RM20m in negative free cash flow over the last twelve months. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Scanwolf Corporation Berhad (3 are a bit unpleasant) you should be aware of.

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.