Does Iskandar Waterfront City Berhad (KLSE:IWCITY) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that Iskandar Waterfront City Berhad (KLSE:IWCITY) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Iskandar Waterfront City Berhad

How Much Debt Does Iskandar Waterfront City Berhad Carry?

As you can see below, at the end of September 2021, Iskandar Waterfront City Berhad had RM415.8m of debt, up from RM195.1m a year ago. Click the image for more detail. On the flip side, it has RM40.3m in cash leading to net debt of about RM375.5m.

How Healthy Is Iskandar Waterfront City Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Iskandar Waterfront City Berhad had liabilities of RM420.5m due within 12 months and liabilities of RM340.4m due beyond that. On the other hand, it had cash of RM40.3m and RM147.6m worth of receivables due within a year. So its liabilities total RM573.0m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM304.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Iskandar Waterfront City Berhad would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Iskandar Waterfront City Berhad's earnings that will influence how the balance sheet holds up in the future. 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, Iskandar Waterfront City Berhad made a loss at the EBIT level, and saw its revenue drop to RM41m, which is a fall of 69%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Iskandar Waterfront City Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at RM12m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through RM15m in negative free cash flow over the last year. That means it's on the risky side of things. 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. For example Iskandar Waterfront City Berhad has 4 warning signs (and 2 which make us uncomfortable) 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.