Would Nova MSC Berhad (KLSE:NOVAMSC) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Nova MSC Berhad (KLSE:NOVAMSC) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, 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 December 2023 Nova MSC Berhad had debt of RM8.00m, up from RM7.56m in one year. However, it does have RM3.77m in cash offsetting this, leading to net debt of about RM4.23m.

How Healthy Is Nova MSC Berhad's Balance Sheet?

According to the last reported balance sheet, Nova MSC Berhad had liabilities of RM26.1m due within 12 months, and liabilities of RM91.0k due beyond 12 months. Offsetting this, it had RM3.77m in cash and RM15.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM6.53m.

Of course, Nova MSC Berhad has a market capitalization of RM125.5m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

Over 12 months, Nova MSC Berhad reported revenue of RM34m, which is a gain of 42%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Nova MSC Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM5.8m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of RM5.5m into a profit. So we do think this stock is quite risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Nova MSC Berhad (including 1 which is concerning) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.