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. Importantly, Iskandar Waterfront City Berhad (KLSE:IWCITY) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Iskandar Waterfront City Berhad

What Is Iskandar Waterfront City Berhad's Net Debt?

As you can see below, Iskandar Waterfront City Berhad had RM425.0m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. However, it also had RM37.2m in cash, and so its net debt is RM387.8m.

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

The latest balance sheet data shows that Iskandar Waterfront City Berhad had liabilities of RM435.0m due within a year, and liabilities of RM360.4m falling due after that. Offsetting this, it had RM37.2m in cash and RM148.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM610.0m.

The deficiency here weighs heavily on the RM280.9m 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 definitely think shareholders need to watch this one closely. 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 it is Iskandar Waterfront City Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Iskandar Waterfront City Berhad had a loss before interest and tax, and actually shrunk its revenue by 84%, to RM15m. That makes us nervous, to say the least.

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 RM11m. 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 RM39m 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 4 warning signs (and 2 which are concerning) we think you should know about.

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.