We Think Scanwolf Corporation Berhad (KLSE:SCNWOLF) Has A Fair Chunk 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?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Net Debt?

As you can see below, Scanwolf Corporation Berhad had RM16.7m of debt at June 2023, down from RM18.9m a year prior. 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 RM41.2m due within 12 months and liabilities of RM7.44m due beyond that. Offsetting these obligations, it had cash of RM200.0k as well as receivables valued at RM7.83m due within 12 months. So its liabilities total RM40.6m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Scanwolf Corporation Berhad is worth RM103.4m, 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Scanwolf Corporation Berhad made a loss at the EBIT level, and saw its revenue drop to RM37m, which is a fall of 6.8%. That's not what we would hope to see.

Caveat Emptor

Importantly, Scanwolf Corporation Berhad had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at RM8.4m. 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 RM2.1m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. For instance, we've identified 3 warning signs for Scanwolf Corporation Berhad (1 is significant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.