Is Can-One Berhad (KLSE:CANONE) Using Debt Sensibly?

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. Importantly, Can-One Berhad (KLSE:CANONE) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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.

View our latest analysis for Can-One Berhad

What Is Can-One Berhad's Net Debt?

As you can see below, Can-One Berhad had RM1.30b of debt at September 2020, down from RM2.16b a year prior. However, it also had RM171.9m in cash, and so its net debt is RM1.13b.

How Strong Is Can-One Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Can-One Berhad had liabilities of RM904.9m due within 12 months and liabilities of RM908.0m due beyond that. Offsetting this, it had RM171.9m in cash and RM572.4m in receivables that were due within 12 months. So its liabilities total RM1.07b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM545.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Can-One Berhad would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Can-One Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Can-One Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 34%, to RM2.6b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Can-One Berhad's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at RM14m. 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. For example, we would not want to see a repeat of last year's loss of RM59m. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Can-One Berhad (2 are significant!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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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