Does Adventa Berhad (KLSE:ADVENTA) Have A Healthy Balance Sheet?

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.' 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 Adventa Berhad (KLSE:ADVENTA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

See our latest analysis for Adventa Berhad

What Is Adventa Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Adventa Berhad had RM11.4m of debt, an increase on RM1.21m, over one year. However, its balance sheet shows it holds RM23.4m in cash, so it actually has RM12.0m net cash.

A Look At Adventa Berhad's Liabilities

According to the balance sheet data, Adventa Berhad had liabilities of RM16.8m due within 12 months, but no longer term liabilities. Offsetting this, it had RM23.4m in cash and RM26.3m in receivables that were due within 12 months. So it can boast RM32.9m more liquid assets than total liabilities.

This surplus strongly suggests that Adventa Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Adventa Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Adventa 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.

Over 12 months, Adventa Berhad made a loss at the EBIT level, and saw its revenue drop to RM54m, which is a fall of 47%. That makes us nervous, to say the least.

So How Risky Is Adventa Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Adventa Berhad had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of RM12m and booked a RM6.7m accounting loss. With only RM12.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that Adventa Berhad is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.