Rex Industry Berhad (KLSE:REX) Is Making Moderate Use Of Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Rex Industry Berhad (KLSE:REX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Rex Industry Berhad

What Is Rex Industry Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Rex Industry Berhad had RM32.7m of debt, an increase on RM26.5m, over one year. On the flip side, it has RM21.3m in cash leading to net debt of about RM11.4m.

A Look At Rex Industry Berhad's Liabilities

According to the last reported balance sheet, Rex Industry Berhad had liabilities of RM62.1m due within 12 months, and liabilities of RM10.3m due beyond 12 months. Offsetting this, it had RM21.3m in cash and RM35.1m in receivables that were due within 12 months. So it has liabilities totalling RM16.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Rex Industry Berhad has a market capitalization of RM72.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Rex Industry 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, Rex Industry Berhad reported revenue of RM166m, which is a gain of 3.9%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Rex Industry Berhad had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at RM3.1m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM8.4m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 3 warning signs for Rex Industry Berhad 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. 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.