The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Eksons Corporation Berhad (KLSE:EKSONS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Eksons Corporation Berhad's Net Debt?
The chart below, which you can click on for greater detail, shows that Eksons Corporation Berhad had RM16.8m in debt in September 2021; about the same as the year before. But it also has RM216.7m in cash to offset that, meaning it has RM199.9m net cash.
A Look At Eksons Corporation Berhad's Liabilities
According to the last reported balance sheet, Eksons Corporation Berhad had liabilities of RM24.6m due within 12 months, and liabilities of RM22.8m due beyond 12 months. Offsetting these obligations, it had cash of RM216.7m as well as receivables valued at RM6.21m due within 12 months. So it actually has RM175.5m more liquid assets than total liabilities.
This luscious liquidity implies that Eksons Corporation Berhad's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Eksons Corporation Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Eksons Corporation 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.
In the last year Eksons Corporation Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 77%, to RM84m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Eksons Corporation Berhad?
Although Eksons Corporation Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of RM1.2m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Given it also grew revenue by 77% over the last year, we think there's a good chance the company is on track. So this may well be an interesting business to watch grow. 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 Eksons Corporation Berhad is showing 3 warning signs in our investment analysis , you should know about...
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.
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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