Does Nova MSC Berhad (KLSE:NOVAMSC) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Nova MSC Berhad (KLSE:NOVAMSC) makes use of debt. But is this debt a concern to shareholders?

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. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Nova MSC Berhad

What Is Nova MSC Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that Nova MSC Berhad had RM7.11m in debt in December 2021; about the same as the year before. However, its balance sheet shows it holds RM12.9m in cash, so it actually has RM5.76m net cash.

How Healthy Is Nova MSC Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nova MSC Berhad had liabilities of RM17.4m due within 12 months and liabilities of RM2.00m due beyond that. Offsetting these obligations, it had cash of RM12.9m as well as receivables valued at RM23.0m due within 12 months. So it can boast RM16.5m more liquid assets than total liabilities.

This surplus suggests that Nova MSC Berhad is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Nova MSC Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Nova MSC 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 Nova MSC Berhad's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Nova MSC Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Nova MSC Berhad had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through RM5.0m of cash and made a loss of RM18m. With only RM5.76m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Case in point: We've spotted 4 warning signs for Nova MSC Berhad you should be aware of, and 1 of them is concerning.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.