Is Concrete Engineering Products Berhad (KLSE:CEPCO) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Concrete Engineering Products Berhad (KLSE:CEPCO) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. 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.

View our latest analysis for Concrete Engineering Products Berhad

How Much Debt Does Concrete Engineering Products Berhad Carry?

As you can see below, Concrete Engineering Products Berhad had RM33.9m of debt, at November 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has RM2.15m in cash leading to net debt of about RM31.7m.

A Look At Concrete Engineering Products Berhad's Liabilities

The latest balance sheet data shows that Concrete Engineering Products Berhad had liabilities of RM70.5m due within a year, and liabilities of RM1.83m falling due after that. On the other hand, it had cash of RM2.15m and RM25.8m worth of receivables due within a year. So its liabilities total RM44.4m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of RM65.7m, so it does suggest shareholders should keep an eye on Concrete Engineering Products Berhad's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Concrete Engineering Products Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Concrete Engineering Products Berhad made a loss at the EBIT level, and saw its revenue drop to RM68m, which is a fall of 33%. To be frank that doesn't bode well.

Caveat Emptor

While Concrete Engineering Products Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping RM16m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through RM6.6m of cash over the last year. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Concrete Engineering Products Berhad (of which 2 are significant!) you should know about.

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.

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This article by Simply Wall St is general in nature. 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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