Does Reach Energy Berhad (KLSE:REACH) 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.' 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. Importantly, Reach Energy Berhad (KLSE:REACH) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Reach Energy Berhad

How Much Debt Does Reach Energy Berhad Carry?

As you can see below, Reach Energy Berhad had RM612.6m of debt at March 2023, down from RM766.8m a year prior. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Reach Energy Berhad's Balance Sheet?

We can see from the most recent balance sheet that Reach Energy Berhad had liabilities of RM218.2m falling due within a year, and liabilities of RM688.9m due beyond that. On the other hand, it had cash of RM6.55m and RM4.73m worth of receivables due within a year. So it has liabilities totalling RM895.8m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM74.5m 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, Reach Energy Berhad would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Reach Energy Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Reach Energy Berhad had a loss before interest and tax, and actually shrunk its revenue by 7.4%, to RM166m. That's not what we would hope to see.

Caveat Emptor

Importantly, Reach Energy Berhad had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM165m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it burned through RM34m in the last year. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. 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. To that end, you should learn about the 5 warning signs we've spotted with Reach Energy Berhad (including 4 which are potentially serious) .

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.