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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Scanwolf Corporation Berhad (KLSE:SCNWOLF) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Scanwolf Corporation Berhad

How Much Debt Does Scanwolf Corporation Berhad Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Scanwolf Corporation Berhad had debt of RM19.0m, up from RM17.4m in one year. On the flip side, it has RM481.3k in cash leading to net debt of about RM18.6m.

A Look At Scanwolf Corporation Berhad's Liabilities

We can see from the most recent balance sheet that Scanwolf Corporation Berhad had liabilities of RM48.1m falling due within a year, and liabilities of RM6.30m due beyond that. On the other hand, it had cash of RM481.3k and RM7.21m worth of receivables due within a year. So its liabilities total RM46.8m more than the combination of its cash and short-term receivables.

Scanwolf Corporation Berhad has a market capitalization of RM101.4m, so it could very likely raise cash to ameliorate 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Scanwolf Corporation Berhad made a loss at the EBIT level, and saw its revenue drop to RM33m, which is a fall of 10%. That's not what we would hope to see.

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). To be specific the EBIT loss came in at RM9.0m. 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 RM6.3m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Scanwolf Corporation Berhad (at least 2 which are significant) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.