Health Check: How Prudently Does Reneuco Berhad (KLSE:RENEUCO) Use Debt?

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 Reneuco Berhad (KLSE:RENEUCO) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Reneuco Berhad

What Is Reneuco Berhad's Net Debt?

As you can see below, at the end of September 2024, Reneuco Berhad had RM291.2m of debt, up from RM87.4m a year ago. Click the image for more detail. However, it does have RM21.1m in cash offsetting this, leading to net debt of about RM270.1m.

How Healthy Is Reneuco Berhad's Balance Sheet?

We can see from the most recent balance sheet that Reneuco Berhad had liabilities of RM171.7m falling due within a year, and liabilities of RM285.3m due beyond that. Offsetting these obligations, it had cash of RM21.1m as well as receivables valued at RM84.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM351.5m.

This deficit casts a shadow over the RM57.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Reneuco Berhad would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Reneuco 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, Reneuco Berhad made a loss at the EBIT level, and saw its revenue drop to RM19m, which is a fall of 63%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Reneuco 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 RM17m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost RM12m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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 example, we've discovered 6 warning signs for Reneuco Berhad (3 are a bit unpleasant!) that you should be aware of before investing here.

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.