Is Nova MSC Berhad (KLSE:NOVAMSC) A Risky Investment?

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. We note that Nova MSC Berhad (KLSE:NOVAMSC) does have debt on its balance sheet. 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. 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.

Check out our latest analysis for Nova MSC Berhad

What Is Nova MSC Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Nova MSC Berhad had debt of RM6.99m at the end of December 2020, a reduction from RM9.12m over a year. However, it does have RM17.7m in cash offsetting this, leading to net cash of RM10.7m.

How Healthy Is Nova MSC Berhad's Balance Sheet?

The latest balance sheet data shows that Nova MSC Berhad had liabilities of RM18.4m due within a year, and liabilities of RM402.0k falling due after that. Offsetting this, it had RM17.7m in cash and RM37.7m in receivables that were due within 12 months. So it actually has RM36.5m more liquid assets than total liabilities.

This surplus strongly suggests that Nova MSC Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Nova MSC Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Nova MSC Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Nova MSC Berhad had a loss before interest and tax, and actually shrunk its revenue by 28%, to RM31m. To be frank that doesn't bode well.

So How Risky Is Nova MSC Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Nova MSC Berhad had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through RM4.8m of cash and made a loss of RM13m. With only RM10.7m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Nova MSC Berhad (1 is a bit unpleasant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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