These 4 Measures Indicate That Revenue Group Berhad (KLSE:REVENUE) Is Using Debt Extensively

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Revenue Group Berhad (KLSE:REVENUE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Revenue Group Berhad

What Is Revenue Group Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Revenue Group Berhad had RM6.29m of debt in December 2020, down from RM7.01m, one year before. However, it does have RM31.7m in cash offsetting this, leading to net cash of RM25.4m.

A Look At Revenue Group Berhad's Liabilities

According to the last reported balance sheet, Revenue Group Berhad had liabilities of RM27.9m due within 12 months, and liabilities of RM6.72m due beyond 12 months. On the other hand, it had cash of RM31.7m and RM16.8m worth of receivables due within a year. So it can boast RM13.8m more liquid assets than total liabilities.

Having regard to Revenue Group Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the RM927.8m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Revenue Group Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Revenue Group Berhad's load is not too heavy, because its EBIT was down 27% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Revenue Group Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Revenue Group Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Revenue Group Berhad recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While it is always sensible to investigate a company's debt, in this case Revenue Group Berhad has RM25.4m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Revenue Group Berhad's balance sheet. 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 instance, we've identified 3 warning signs for Revenue Group Berhad that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.