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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Concrete Engineering Products Berhad (KLSE:CEPCO) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Concrete Engineering Products Berhad

What Is Concrete Engineering Products Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Concrete Engineering Products Berhad had RM29.5m of debt in May 2021, down from RM33.6m, one year before. On the flip side, it has RM2.42m in cash leading to net debt of about RM27.1m.

How Strong Is Concrete Engineering Products Berhad's Balance Sheet?

The latest balance sheet data shows that Concrete Engineering Products Berhad had liabilities of RM72.8m due within a year, and liabilities of RM1.44m falling due after that. Offsetting these obligations, it had cash of RM2.42m as well as receivables valued at RM20.3m due within 12 months. So its liabilities total RM51.5m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of RM63.4m, 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 you can't view debt in total isolation; since Concrete Engineering Products 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.

Over 12 months, Concrete Engineering Products Berhad made a loss at the EBIT level, and saw its revenue drop to RM75m, which is a fall of 13%. That's not what we would hope to see.

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 RM15m. 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. Another cause for caution is that is bled RM2.0m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Concrete Engineering Products Berhad (2 shouldn't be ignored!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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