Is AwanBiru Technology Berhad (KLSE:AWANTEC) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that AwanBiru Technology Berhad (KLSE:AWANTEC) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

As you can see below, AwanBiru Technology Berhad had RM17.0m of debt at September 2022, down from RM23.3m a year prior. But it also has RM18.0m in cash to offset that, meaning it has RM993.0k net cash.

A Look At AwanBiru Technology Berhad's Liabilities

We can see from the most recent balance sheet that AwanBiru Technology Berhad had liabilities of RM224.2m falling due within a year, and liabilities of RM30.2m due beyond that. Offsetting these obligations, it had cash of RM18.0m as well as receivables valued at RM381.3m due within 12 months. So it can boast RM144.9m more liquid assets than total liabilities.

This excess liquidity is a great indication that AwanBiru Technology Berhad's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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.

Although AwanBiru Technology Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM7.4m in EBIT over the last twelve months. 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.

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 year, 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 we empathize with investors who find debt concerning, you should keep in mind that AwanBiru Technology Berhad has net cash of RM993.0k, as well as more liquid assets than liabilities. So we don't have any problem with AwanBiru Technology Berhad's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with AwanBiru Technology Berhad .

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.