AwanBiru Technology Berhad (KLSE:AWANTEC) Has Debt But No Earnings; Should You Worry?

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 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. We can see that AwanBiru Technology Berhad (KLSE:AWANTEC) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for AwanBiru Technology Berhad

What Is AwanBiru Technology Berhad's Net Debt?

As you can see below, AwanBiru Technology Berhad had RM22.4m of debt at December 2021, down from RM49.7m a year prior. But it also has RM32.0m in cash to offset that, meaning it has RM9.62m net cash.

How Healthy Is AwanBiru Technology Berhad's Balance Sheet?

According to the last reported balance sheet, AwanBiru Technology Berhad had liabilities of RM216.2m due within 12 months, and liabilities of RM35.4m due beyond 12 months. On the other hand, it had cash of RM32.0m and RM367.0m worth of receivables due within a year. So it actually has RM147.4m more liquid assets than total liabilities.

This surplus liquidity suggests that AwanBiru Technology Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that AwanBiru Technology Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine AwanBiru Technology Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year AwanBiru Technology Berhad had a loss before interest and tax, and actually shrunk its revenue by 40%, to RM96m. To be frank that doesn't bode well.

So How Risky Is AwanBiru Technology Berhad?

While AwanBiru Technology Berhad lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of RM4.6m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that AwanBiru Technology Berhad is showing 1 warning sign in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.