Health Check: How Prudently Does AwanBiru Technology Berhad (KLSE:AWANTEC) Use Debt?

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.' 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. Importantly, AwanBiru Technology Berhad (KLSE:AWANTEC) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See 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 RM16.1m of debt in December 2022, down from RM22.4m, one year before. However, it does have RM20.3m in cash offsetting this, leading to net cash of RM4.18m.

How Healthy Is AwanBiru Technology Berhad's Balance Sheet?

According to the last reported balance sheet, AwanBiru Technology Berhad had liabilities of RM214.1m due within 12 months, and liabilities of RM29.2m due beyond 12 months. On the other hand, it had cash of RM20.3m and RM365.9m worth of receivables due within a year. So it can boast RM142.8m 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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, AwanBiru Technology Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! 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 47%, to RM51m. That makes us nervous, to say the least.

So How Risky Is AwanBiru Technology Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that AwanBiru Technology Berhad had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through RM5.8m of cash and made a loss of RM4.2m. Given it only has net cash of RM4.18m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with AwanBiru Technology Berhad , and understanding them should be part of your investment process.

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.