Is Iskandar Waterfront City Berhad (KLSE:IWCITY) Using Debt In A Risky Way?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Iskandar Waterfront City Berhad (KLSE:IWCITY) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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.

View our latest analysis for Iskandar Waterfront City Berhad

What Is Iskandar Waterfront City Berhad's Debt?

As you can see below, Iskandar Waterfront City Berhad had RM426.1m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has RM34.2m in cash leading to net debt of about RM391.9m.

A Look At Iskandar Waterfront City Berhad's Liabilities

We can see from the most recent balance sheet that Iskandar Waterfront City Berhad had liabilities of RM425.5m falling due within a year, and liabilities of RM375.6m due beyond that. Offsetting this, it had RM34.2m in cash and RM150.4m in receivables that were due within 12 months. So its liabilities total RM616.5m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM248.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Iskandar Waterfront City Berhad would probably need a major re-capitalization if its creditors were to demand repayment. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Iskandar Waterfront City Berhad made a loss at the EBIT level, and saw its revenue drop to RM12m, which is a fall of 75%. 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). Indeed, it lost RM13m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of RM1.1m over the last twelve months. That means it's on the risky side of things. 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 Iskandar Waterfront City Berhad has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.