Is Nova MSC Berhad (KLSE:NOVAMSC) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Nova MSC Berhad (KLSE:NOVAMSC) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Nova MSC Berhad

What Is Nova MSC Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Nova MSC Berhad had RM7.08m of debt in March 2021, down from RM12.2m, one year before. But on the other hand it also has RM20.1m in cash, leading to a RM13.0m net cash position.

A Look At Nova MSC Berhad's Liabilities

According to the last reported balance sheet, Nova MSC Berhad had liabilities of RM18.9m due within 12 months, and liabilities of RM33.0k due beyond 12 months. On the other hand, it had cash of RM20.1m and RM33.1m worth of receivables due within a year. So it can boast RM34.3m more liquid assets than total liabilities.

It's good to see that Nova MSC Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues 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! There's no doubt that we learn most about debt from the balance sheet. 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 19%, to RM32m. We would much prefer see growth.

So How Risky Is Nova MSC Berhad?

While Nova MSC Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM183k. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. We've identified 3 warning signs with Nova MSC Berhad , and understanding them should be part of your investment process.

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. 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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