Does Quality Concrete Holdings Berhad (KLSE:QUALITY) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Quality Concrete Holdings Berhad (KLSE:QUALITY) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Quality Concrete Holdings Berhad

What Is Quality Concrete Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of January 2024 Quality Concrete Holdings Berhad had RM97.0m of debt, an increase on RM85.6m, over one year. However, it does have RM29.8m in cash offsetting this, leading to net debt of about RM67.2m.

How Strong Is Quality Concrete Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Quality Concrete Holdings Berhad had liabilities of RM163.3m due within a year, and liabilities of RM13.5m falling due after that. On the other hand, it had cash of RM29.8m and RM93.1m worth of receivables due within a year. So it has liabilities totalling RM53.9m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of RM59.1m. 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 it is Quality Concrete Holdings 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 Quality Concrete Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 15%, to RM178m. We would much prefer see growth.

Caveat Emptor

While Quality Concrete Holdings 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. Indeed, it lost RM4.6m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM6.1m of cash over the last year. So in short it's a really risky stock. 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. Case in point: We've spotted 2 warning signs for Quality Concrete Holdings Berhad you should be aware of, and 1 of them is potentially serious.

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.