Is Quality Concrete Holdings Berhad (KLSE:QUALITY) A Risky Investment?

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 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 A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Quality Concrete Holdings Berhad

What Is Quality Concrete Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that at October 2023 Quality Concrete Holdings Berhad had debt of RM102.0m, up from RM86.5m in one year. However, it does have RM18.5m in cash offsetting this, leading to net debt of about RM83.5m.

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

We can see from the most recent balance sheet that Quality Concrete Holdings Berhad had liabilities of RM162.3m falling due within a year, and liabilities of RM20.0m due beyond that. Offsetting this, it had RM18.5m in cash and RM114.1m in receivables that were due within 12 months. So its liabilities total RM49.7m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of RM69.0m, so it does suggest shareholders should keep an eye on Quality Concrete Holdings 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. 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 Quality Concrete Holdings 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, Quality Concrete Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM183m, which is a fall of 13%. We would much prefer see growth.

Caveat Emptor

Not only did Quality Concrete Holdings 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 RM7.9m 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. Another cause for caution is that is bled RM2.8m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Quality Concrete Holdings Berhad , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.