Does Awanbiru Technology Berhad (KLSE:AWANTEC) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Awanbiru Technology Berhad (KLSE:AWANTEC) does use debt in its business. 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Awanbiru Technology Berhad

How Much Debt Does Awanbiru Technology Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Awanbiru Technology Berhad had RM49.7m of debt in December 2020, down from RM72.1m, one year before. However, its balance sheet shows it holds RM69.2m in cash, so it actually has RM19.5m net cash.

A Look At Awanbiru Technology Berhad's Liabilities

According to the last reported balance sheet, Awanbiru Technology Berhad had liabilities of RM100.5m due within 12 months, and liabilities of RM40.6m due beyond 12 months. Offsetting these obligations, it had cash of RM69.2m as well as receivables valued at RM215.1m due within 12 months. So it actually has RM143.3m more liquid assets than total liabilities.

This excess liquidity suggests that Awanbiru Technology Berhad is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Awanbiru Technology Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Awanbiru Technology Berhad's EBIT fell a jaw-dropping 75% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Awanbiru Technology Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Awanbiru Technology Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Awanbiru Technology Berhad saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Awanbiru Technology Berhad has RM19.5m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Awanbiru Technology Berhad's balance sheet. 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. To that end, you should learn about the 2 warning signs we've spotted with Awanbiru Technology Berhad (including 1 which is concerning) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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