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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Awanbiru Technology Berhad (KLSE:AWANTEC) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Awanbiru Technology Berhad

How Much Debt Does Awanbiru Technology Berhad Carry?

The image below, which you can click on for greater detail, shows that Awanbiru Technology Berhad had debt of RM32.6m at the end of March 2021, a reduction from RM72.1m over a year. However, it does have RM45.6m in cash offsetting this, leading to net cash of RM13.0m.

How Healthy Is Awanbiru Technology Berhad's Balance Sheet?

We can see from the most recent balance sheet that Awanbiru Technology Berhad had liabilities of RM65.6m falling due within a year, and liabilities of RM37.4m due beyond that. Offsetting this, it had RM45.6m in cash and RM203.3m in receivables that were due within 12 months. So it actually has RM145.9m more liquid assets than total liabilities.

This surplus suggests that Awanbiru Technology Berhad is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. 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.

Shareholders should be aware that Awanbiru Technology Berhad's EBIT was down 62% last year. 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 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Awanbiru Technology Berhad has RM13.0m in net cash and a decent-looking balance sheet. So while Awanbiru Technology Berhad does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Awanbiru Technology Berhad is showing 3 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.

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