Is Adventa Berhad (KLSE:ADVENTA) Using Debt In A Risky Way?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Adventa Berhad (KLSE:ADVENTA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Adventa Berhad

What Is Adventa Berhad's Debt?

As you can see below, Adventa Berhad had RM7.19m of debt at September 2024, down from RM17.0m a year prior. However, it does have RM14.2m in cash offsetting this, leading to net cash of RM6.99m.

How Strong Is Adventa Berhad's Balance Sheet?

According to the balance sheet data, Adventa Berhad had liabilities of RM12.8m due within 12 months, but no longer term liabilities. On the other hand, it had cash of RM14.2m and RM19.5m worth of receivables due within a year. So it actually has RM21.0m more liquid assets than total liabilities.

It's good to see that Adventa Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Adventa Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Adventa Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Adventa Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to RM50m. Shareholders probably have their fingers crossed that it can grow its way to profits.

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 RM16m and booked a RM2.5m accounting loss. Given it only has net cash of RM6.99m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Adventa Berhad may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Case in point: We've spotted 3 warning signs for Adventa Berhad you should be aware of, and 1 of them is concerning.

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.