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. Importantly, Nova MSC Berhad (KLSE:NOVAMSC) does carry debt. But is this debt a concern to shareholders?

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. 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. 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 Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Nova MSC Berhad had debt of RM8.07m, up from RM7.63m in one year. However, because it has a cash reserve of RM4.50m, its net debt is less, at about RM3.58m.

A Look At Nova MSC Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Nova MSC Berhad had liabilities of RM27.7m due within 12 months and liabilities of RM48.0k due beyond that. Offsetting these obligations, it had cash of RM4.50m as well as receivables valued at RM13.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM9.40m.

Since publicly traded Nova MSC Berhad shares are worth a total of RM278.5m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Nova MSC Berhad has a very light debt load indeed. 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 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 21%, to RM33m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Nova MSC Berhad's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost RM10.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM365k of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Nova MSC Berhad (2 can't be ignored) you should be aware of.

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. 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.

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