Stock Analysis

We Think Ancom Nylex Berhad (KLSE:ANCOMNY) Can Stay On Top Of Its Debt

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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 note that Ancom Nylex Berhad (KLSE:ANCOMNY) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Ancom Nylex Berhad

What Is Ancom Nylex Berhad's Debt?

As you can see below, at the end of November 2022, Ancom Nylex Berhad had RM412.2m of debt, up from RM324.4m a year ago. Click the image for more detail. However, it does have RM141.6m in cash offsetting this, leading to net debt of about RM270.7m.

KLSE:ANCOMNY Debt to Equity History March 17th 2023

A Look At Ancom Nylex Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Ancom Nylex Berhad had liabilities of RM577.5m due within 12 months and liabilities of RM117.5m due beyond that. On the other hand, it had cash of RM141.6m and RM389.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM163.9m.

Of course, Ancom Nylex Berhad has a market capitalization of RM996.7m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With a debt to EBITDA ratio of 1.9, Ancom Nylex Berhad uses debt artfully but responsibly. And the alluring interest cover (EBIT of 7.6 times interest expense) certainly does not do anything to dispel this impression. Importantly, Ancom Nylex Berhad grew its EBIT by 56% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ancom Nylex Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Ancom Nylex Berhad recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Happily, Ancom Nylex Berhad's impressive EBIT growth rate implies it has the upper hand on its debt. And its interest cover is good too. When we consider the range of factors above, it looks like Ancom Nylex Berhad is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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 instance, we've identified 2 warning signs for Ancom Nylex Berhad that you should be aware of.

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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