Does Nova MSC Berhad (KLSE:NOVAMSC) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Nova MSC Berhad (KLSE:NOVAMSC) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Nova MSC Berhad

What Is Nova MSC Berhad's Debt?

As you can see below, Nova MSC Berhad had RM7.14m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has RM14.5m in cash to offset that, meaning it has RM7.33m net cash.

A Look At Nova MSC Berhad's Liabilities

According to the last reported balance sheet, Nova MSC Berhad had liabilities of RM22.9m due within 12 months, and liabilities of RM1.77m due beyond 12 months. Offsetting this, it had RM14.5m in cash and RM21.8m in receivables that were due within 12 months. So it can boast RM11.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Nova MSC Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Nova MSC Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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 had a loss before interest and tax, and actually shrunk its revenue by 36%, to RM23m. That makes us nervous, to say the least.

So How Risky Is Nova MSC Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Nova MSC Berhad had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of RM5.8m and booked a RM20m accounting loss. Given it only has net cash of RM7.33m, the company may need to raise more capital if it doesn't reach break-even 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Nova MSC Berhad (of which 1 is significant!) 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.