Is Reach Energy Berhad (KLSE:REACH) A Risky Investment?

Warren Buffett famously said, '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. Importantly, Reach Energy Berhad (KLSE:REACH) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Reach Energy Berhad

What Is Reach Energy Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Reach Energy Berhad had RM763.0m of debt, an increase on RM648.6m, over one year. However, because it has a cash reserve of RM44.5m, its net debt is less, at about RM718.5m.

How Strong Is Reach Energy Berhad's Balance Sheet?

The latest balance sheet data shows that Reach Energy Berhad had liabilities of RM497.5m due within a year, and liabilities of RM476.1m falling due after that. Offsetting these obligations, it had cash of RM44.5m as well as receivables valued at RM4.91m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM924.2m.

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'd watch its balance sheet closely, without a doubt. After all, Reach Energy 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 you can't view debt in total isolation; since Reach Energy 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 Reach Energy Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 89%, to RM151m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Reach Energy Berhad's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable RM34m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. 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 lost RM53m in the last year. So we think buying this stock is 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. Case in point: We've spotted 3 warning signs for Reach Energy Berhad you should be aware of, and 1 of them makes us a bit uncomfortable.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.