Is Concrete Engineering Products Berhad (KLSE:CEPCO) Using Too Much 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. As with many other companies Concrete Engineering Products Berhad (KLSE:CEPCO) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Concrete Engineering Products Berhad

How Much Debt Does Concrete Engineering Products Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Concrete Engineering Products Berhad had RM31.0m of debt in August 2020, down from RM33.3m, one year before. However, because it has a cash reserve of RM4.66m, its net debt is less, at about RM26.3m.

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

We can see from the most recent balance sheet that Concrete Engineering Products Berhad had liabilities of RM71.2m falling due within a year, and liabilities of RM2.10m due beyond that. Offsetting these obligations, it had cash of RM4.66m as well as receivables valued at RM22.6m due within 12 months. So it has liabilities totalling RM46.0m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of RM46.3m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. 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 RM80m, which is a fall of 21%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Concrete Engineering Products Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM12m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of RM18m. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Concrete Engineering Products Berhad (2 are concerning) you should be aware of.

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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