Is Country View Berhad (KLSE:CVIEW) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Country View Berhad (KLSE:CVIEW) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Country View Berhad

What Is Country View Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Country View Berhad had RM212.5m in debt in May 2022; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Country View Berhad's Balance Sheet?

According to the last reported balance sheet, Country View Berhad had liabilities of RM65.5m due within 12 months, and liabilities of RM186.6m due beyond 12 months. Offsetting these obligations, it had cash of RM3.04m as well as receivables valued at RM25.7m due within 12 months. So it has liabilities totalling RM223.4m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM87.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Country View Berhad would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Country View 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, Country View Berhad made a loss at the EBIT level, and saw its revenue drop to RM54m, which is a fall of 37%. That makes us nervous, to say the least.

Caveat Emptor

While Country View 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. To be specific the EBIT loss came in at RM1.1m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But on the bright side the company actually produced a statutory profit of RM2.8m and free cash flow of RM8.8m. So one might argue that there's still a chance it can get things on the right track. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Country View Berhad has 6 warning signs (and 3 which are significant) 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.