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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Nova MSC Berhad (KLSE:NOVAMSC) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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

How Much Debt Does Nova MSC Berhad Carry?

As you can see below, Nova MSC Berhad had RM7.07m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM14.9m in cash offsetting this, leading to net cash of RM7.85m.

How Strong Is Nova MSC Berhad's Balance Sheet?

According to the last reported balance sheet, Nova MSC Berhad had liabilities of RM18.1m due within 12 months, and liabilities of RM2.42m due beyond 12 months. Offsetting this, it had RM14.9m in cash and RM32.7m in receivables that were due within 12 months. So it actually has RM27.2m more liquid assets than total liabilities.

This surplus suggests that Nova MSC Berhad is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any 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! When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Nova MSC Berhad made a loss at the EBIT level, and saw its revenue drop to RM34m, which is a fall of 4.1%. We would much prefer see growth.

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. And over the same period it saw negative free cash outflow of RM3.5m and booked a RM15m accounting loss. Given it only has net cash of RM7.85m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Nova MSC Berhad (1 is potentially serious!) that you should be aware of before investing here.

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.