Is Impiana Hotels Berhad (KLSE:IMPIANA) Using Debt Sensibly?

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 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. Importantly, Impiana Hotels Berhad (KLSE:IMPIANA) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Impiana Hotels Berhad

How Much Debt Does Impiana Hotels Berhad Carry?

As you can see below, Impiana Hotels Berhad had RM82.8m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM2.44m in cash offsetting this, leading to net debt of about RM80.4m.

How Strong Is Impiana Hotels Berhad's Balance Sheet?

We can see from the most recent balance sheet that Impiana Hotels Berhad had liabilities of RM74.7m falling due within a year, and liabilities of RM83.6m due beyond that. Offsetting these obligations, it had cash of RM2.44m as well as receivables valued at RM35.4m due within 12 months. So it has liabilities totalling RM120.4m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM49.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Impiana Hotels Berhad would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Impiana Hotels Berhad's earnings that will influence how the balance sheet holds up in the future. 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 had a loss before interest and tax, and actually shrunk its revenue by 26%, to RM18m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Impiana Hotels Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at RM1.3m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of RM1.8m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. For instance, we've identified 6 warning signs for Impiana Hotels Berhad (3 are significant) you should be aware of.

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.