Is Iskandar Waterfront City Berhad (KLSE:IWCITY) Weighed On By Its Debt Load?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Iskandar Waterfront City Berhad (KLSE:IWCITY) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at 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 RM425.4m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, it also had RM26.3m in cash, and so its net debt is RM399.1m.

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 RM396.6m due within 12 months and liabilities of RM386.9m due beyond that. On the other hand, it had cash of RM26.3m and RM155.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM601.6m.

This deficit casts a shadow over the RM257.9m 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 RM26m, which is a fall of 36%. 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 RM5.5m. 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 burned through RM2.3m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Iskandar Waterfront City Berhad (1 is a bit concerning) you should be aware of.

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.