Is Impiana Hotels Berhad (KLSE:IMPIANA) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Impiana Hotels Berhad (KLSE:IMPIANA) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Impiana Hotels Berhad

What Is Impiana Hotels Berhad's Net Debt?

As you can see below, Impiana Hotels Berhad had RM72.6m of debt at June 2021, down from RM81.1m a year prior. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Impiana Hotels Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Impiana Hotels Berhad had liabilities of RM81.4m due within 12 months and liabilities of RM74.1m due beyond that. Offsetting these obligations, it had cash of RM851.0k as well as receivables valued at RM57.8m due within 12 months. So it has liabilities totalling RM96.9m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of RM98.6m, so it does suggest shareholders should keep an eye on Impiana Hotels Berhad's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Impiana Hotels Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Impiana Hotels Berhad's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Impiana Hotels Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM630k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled RM2.2m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Impiana Hotels Berhad is showing 4 warning signs in our investment analysis , and 1 of those is significant...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.
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