We Think Adventa Berhad (KLSE:ADVENTA) Can Stay On Top Of Its Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Adventa Berhad (KLSE:ADVENTA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Adventa Berhad

How Much Debt Does Adventa Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Adventa Berhad had RM11.1m of debt in September 2021, down from RM21.7m, one year before. However, it does have RM16.7m in cash offsetting this, leading to net cash of RM5.62m.

How Healthy Is Adventa Berhad's Balance Sheet?

According to the balance sheet data, Adventa Berhad had liabilities of RM29.8m due within 12 months, but no longer term liabilities. On the other hand, it had cash of RM16.7m and RM45.0m worth of receivables due within a year. So it can boast RM31.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Adventa Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Adventa Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Adventa Berhad improved its EBIT from a last year's loss to a positive RM363k. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Adventa Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Adventa Berhad burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Adventa Berhad has RM5.62m in net cash and a decent-looking balance sheet. So we are not troubled with Adventa Berhad's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Adventa Berhad (at least 1 which is significant) , and understanding them should be part of your investment process.

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.

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.

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