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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Nova MSC Berhad (KLSE:NOVAMSC) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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.

Check out our latest analysis for Nova MSC Berhad

What Is Nova MSC Berhad's Net Debt?

As you can see below, at the end of March 2023, Nova MSC Berhad had RM7.63m of debt, up from RM7.14m a year ago. Click the image for more detail. On the flip side, it has RM6.71m in cash leading to net debt of about RM922.0k.

How Strong Is Nova MSC Berhad's Balance Sheet?

We can see from the most recent balance sheet that Nova MSC Berhad had liabilities of RM25.6m falling due within a year, and liabilities of RM885.0k due beyond that. Offsetting this, it had RM6.71m in cash and RM17.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM2.56m.

This state of affairs indicates that Nova MSC Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the RM130.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Nova MSC Berhad has virtually no net debt, so it's fair to say it does not have a heavy debt load! 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to RM27m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Nova MSC Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable RM17m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM9.5m of cash over the last year. So in short it's a really risky stock. 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. To that end, you should learn about the 3 warning signs we've spotted with Nova MSC Berhad (including 2 which are concerning) .

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.