Is Adventa Berhad (KLSE:ADVENTA) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that Adventa Berhad (KLSE:ADVENTA) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Adventa Berhad

What Is Adventa Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Adventa Berhad had RM9.46m of debt, an increase on RM3.04m, over one year. But it also has RM21.7m in cash to offset that, meaning it has RM12.2m net cash.

How Healthy Is Adventa Berhad's Balance Sheet?

The latest balance sheet data shows that Adventa Berhad had liabilities of RM5.75m due within a year, and liabilities of RM7.13m falling due after that. Offsetting these obligations, it had cash of RM21.7m as well as receivables valued at RM24.2m due within 12 months. So it can boast RM33.0m more liquid assets than total liabilities.

This luscious liquidity implies that Adventa Berhad's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Adventa Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. 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 had a loss before interest and tax, and actually shrunk its revenue by 63%, to RM39m. 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 in the last year Adventa Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM12m and booked a RM9.3m accounting loss. Given it only has net cash of RM12.2m, the company may need to raise more capital if it doesn't reach break-even 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Adventa Berhad that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.