Is Iskandar Waterfront City Berhad (KLSE:IWCITY) Using Too Much Debt?

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.' 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 Iskandar Waterfront City Berhad (KLSE:IWCITY) makes use of debt. But should shareholders be worried about its use of debt?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

How Much Debt Does Iskandar Waterfront City Berhad Carry?

The image below, which you can click on for greater detail, shows that Iskandar Waterfront City Berhad had debt of RM376.4m at the end of December 2024, a reduction from RM402.6m over a year. However, because it has a cash reserve of RM28.6m, its net debt is less, at about RM347.8m.

A Look At Iskandar Waterfront City Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Iskandar Waterfront City Berhad had liabilities of RM485.9m due within 12 months and liabilities of RM167.2m due beyond that. Offsetting these obligations, it had cash of RM28.6m as well as receivables valued at RM155.3m due within 12 months. So its liabilities total RM469.2m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's RM377.7m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Iskandar Waterfront City 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.

Check out our latest analysis for Iskandar Waterfront City Berhad

Over 12 months, Iskandar Waterfront City Berhad made a loss at the EBIT level, and saw its revenue drop to RM102m, which is a fall of 2.8%. That's not what we would hope to see.

Caveat Emptor

Importantly, Iskandar Waterfront City Berhad had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at RM17m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of RM19m. In the meantime, we consider the stock to be risky. 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. For example, we've discovered 3 warning signs for Iskandar Waterfront City Berhad (1 shouldn't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.