Stock Analysis

Reach Energy Berhad (KLSE:REACH) Has Debt But No Earnings; Should You Worry?

KLSE:REACH
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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Reach Energy Berhad (KLSE:REACH) makes use of debt. But the real question is whether this debt is making the company risky.

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Reach Energy Berhad

What Is Reach Energy Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Reach Energy Berhad had debt of RM712.6m, up from RM655.1m in one year. However, it does have RM33.0m in cash offsetting this, leading to net debt of about RM679.6m.

debt-equity-history-analysis
KLSE:REACH Debt to Equity History January 7th 2022

How Strong Is Reach Energy Berhad's Balance Sheet?

According to the last reported balance sheet, Reach Energy Berhad had liabilities of RM433.5m due within 12 months, and liabilities of RM448.8m due beyond 12 months. On the other hand, it had cash of RM33.0m and RM5.51m worth of receivables due within a year. So its liabilities total RM843.8m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM71.3m company, like a colossus towering over mere mortals. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Reach Energy Berhad reported revenue of RM119m, which is a gain of 25%, although it did not report any earnings before interest and tax. 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 RM143m 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. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost RM65m in the last year. So we're not very excited about owning this stock. Its too risky for us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Reach Energy Berhad has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.