Is Cypark Resources Berhad (KLSE:CYPARK) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Cypark Resources Berhad (KLSE:CYPARK) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for Cypark Resources Berhad

What Is Cypark Resources Berhad's Net Debt?

As you can see below, Cypark Resources Berhad had RM1.45b of debt, at April 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had RM108.4m in cash, and so its net debt is RM1.34b.

How Strong Is Cypark Resources Berhad's Balance Sheet?

The latest balance sheet data shows that Cypark Resources Berhad had liabilities of RM529.4m due within a year, and liabilities of RM1.19b falling due after that. Offsetting these obligations, it had cash of RM108.4m as well as receivables valued at RM853.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM756.0m.

Given this deficit is actually higher than the company's market capitalization of RM746.6m, we think shareholders really should watch Cypark Resources Berhad's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Cypark Resources Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Cypark Resources Berhad had a loss before interest and tax, and actually shrunk its revenue by 32%, to RM208m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Cypark Resources 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 RM38m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of RM153m over the last twelve months. That means it's on the risky side of things. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Cypark Resources Berhad (of which 1 doesn't sit too well with us!) you should know about.

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.