Auditors Are Concerned About NPC Resources Berhad (KLSE:NPC)

Unfortunately for shareholders, when NPC Resources Berhad (KLSE:NPC) reported results for the period to December 2020, its auditors, Ernst & Young LLP, expressed uncertainty about whether it can continue as a going concern. This means that, based on the financial results to that date, the company arguably should raise capital, or otherwise strengthen the balance sheet, as soon as possible.

Since the company probably needs cash fairly quickly, it may be in a position where it has to accept whatever terms it can get. So shareholders should absolutely be taking a close look at how risky the balance sheet is. The big consideration is whether it can repay its debt, since in the worst case scenario, creditors could force the company to bankruptcy.

Check out our latest analysis for NPC Resources Berhad

What Is NPC Resources Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that NPC Resources Berhad had RM552.7m of debt in December 2020, down from RM591.5m, one year before. On the flip side, it has RM13.0m in cash leading to net debt of about RM539.7m.

How Healthy Is NPC Resources Berhad's Balance Sheet?

The latest balance sheet data shows that NPC Resources Berhad had liabilities of RM504.3m due within a year, and liabilities of RM296.2m falling due after that. On the other hand, it had cash of RM13.0m and RM12.1m worth of receivables due within a year. So its liabilities total RM775.4m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM220.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, NPC Resources Berhad would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since NPC Resources 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 NPC Resources Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to RM265m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months NPC Resources Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost RM15m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of RM12m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. We prefer to avoid a company after its auditor has expressed any uncertainty about its ability to continue as a going concern. That's because we find it more comfortable to invest in companies that always keep the balance sheet reasonably strong. 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. To that end, you should learn about the 3 warning signs we've spotted with NPC Resources Berhad (including 2 which make us 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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