Is Quality Concrete Holdings Berhad (KLSE:QUALITY) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Quality Concrete Holdings Berhad (KLSE:QUALITY) does use debt in its business. 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Quality Concrete Holdings Berhad

How Much Debt Does Quality Concrete Holdings Berhad Carry?

As you can see below, Quality Concrete Holdings Berhad had RM103.7m of debt, at October 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has RM11.5m in cash leading to net debt of about RM92.1m.

A Look At Quality Concrete Holdings Berhad's Liabilities

According to the last reported balance sheet, Quality Concrete Holdings Berhad had liabilities of RM183.3m due within 12 months, and liabilities of RM16.5m due beyond 12 months. Offsetting these obligations, it had cash of RM11.5m as well as receivables valued at RM121.7m due within 12 months. So its liabilities total RM66.6m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of RM70.1m, so it does suggest shareholders should keep an eye on Quality Concrete Holdings Berhad's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Quality Concrete Holdings 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, Quality Concrete Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM155m, which is a fall of 15%. That's not what we would hope to see.

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 RM4.5m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM1.7m of cash over the last year. So to be blunt we think it is risky. 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. For example Quality Concrete Holdings Berhad has 3 warning signs (and 2 which are potentially serious) we think you should know about.

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.