Revenue Group Berhad (KLSE:REVENUE) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Revenue Group Berhad (KLSE:REVENUE) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Revenue Group Berhad

What Is Revenue Group Berhad's Debt?

The image below, which you can click on for greater detail, shows that Revenue Group Berhad had debt of RM6.49m at the end of September 2020, a reduction from RM9.65m over a year. But it also has RM37.3m in cash to offset that, meaning it has RM30.8m net cash.

How Strong Is Revenue Group Berhad's Balance Sheet?

The latest balance sheet data shows that Revenue Group Berhad had liabilities of RM33.8m due within a year, and liabilities of RM6.56m falling due after that. Offsetting this, it had RM37.3m in cash and RM22.7m in receivables that were due within 12 months. So it actually has RM19.6m more liquid assets than total liabilities.

This surplus suggests that Revenue Group Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Revenue Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Revenue Group Berhad if management cannot prevent a repeat of the 23% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Revenue Group Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Revenue Group Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, Revenue Group Berhad actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While it is always sensible to investigate a company's debt, in this case Revenue Group Berhad has RM30.8m in net cash and a decent-looking balance sheet. So we don't have any problem with Revenue Group Berhad's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Revenue Group Berhad .

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. 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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