Would Concrete Engineering Products Berhad (KLSE:CEPCO) Be Better Off With Less Debt?

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 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 the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. 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?

You can click the graphic below for the historical numbers, but it shows that Concrete Engineering Products Berhad had RM28.6m of debt in August 2021, down from RM31.0m, one year before. However, because it has a cash reserve of RM7.90m, its net debt is less, at about RM20.7m.

A Look At Concrete Engineering Products Berhad's Liabilities

According to the last reported balance sheet, Concrete Engineering Products Berhad had liabilities of RM76.8m due within 12 months, and liabilities of RM1.18m due beyond 12 months. On the other hand, it had cash of RM7.90m and RM18.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM51.5m.

This is a mountain of leverage relative to its market capitalization of RM69.4m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Concrete Engineering Products Berhad will need earnings to service that debt. 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 reported revenue of RM84m, which is a gain of 5.5%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Concrete Engineering Products Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM14m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of RM17m into a profit. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Concrete Engineering Products Berhad (of which 1 is concerning!) you should know about.

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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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.