Box-Pak (Malaysia) Bhd (KLSE:BOXPAK) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, '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. As with many other companies Box-Pak (Malaysia) Bhd. (KLSE:BOXPAK) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

Check out the opportunities and risks within the MY Packaging industry.

How Much Debt Does Box-Pak (Malaysia) Bhd Carry?

The chart below, which you can click on for greater detail, shows that Box-Pak (Malaysia) Bhd had RM257.3m in debt in June 2022; about the same as the year before. However, it does have RM34.8m in cash offsetting this, leading to net debt of about RM222.5m.

How Healthy Is Box-Pak (Malaysia) Bhd's Balance Sheet?

According to the last reported balance sheet, Box-Pak (Malaysia) Bhd had liabilities of RM429.1m due within 12 months, and liabilities of RM56.8m due beyond 12 months. Offsetting these obligations, it had cash of RM34.8m as well as receivables valued at RM213.8m due within 12 months. So its liabilities total RM237.3m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the RM111.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Box-Pak (Malaysia) Bhd would probably need a major re-capitalization if its creditors were to demand repayment. 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 Box-Pak (Malaysia) Bhd 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.

Over 12 months, Box-Pak (Malaysia) Bhd made a loss at the EBIT level, and saw its revenue drop to RM699m, which is a fall of 3.6%. We would much prefer see growth.

Caveat Emptor

Importantly, Box-Pak (Malaysia) Bhd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM26m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through RM27m in negative free cash flow over the last year. That means it's on the risky side of things. 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. Be aware that Box-Pak (Malaysia) Bhd is showing 3 warning signs in our investment analysis , and 2 of those are concerning...

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.