Is IRIS Corporation Berhad (KLSE:IRIS) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies IRIS Corporation Berhad (KLSE:IRIS) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for IRIS Corporation Berhad

What Is IRIS Corporation Berhad's Net Debt?

As you can see below, IRIS Corporation Berhad had RM18.8m of debt at March 2021, down from RM31.3m a year prior. But it also has RM78.9m in cash to offset that, meaning it has RM60.1m net cash.

A Look At IRIS Corporation Berhad's Liabilities

The latest balance sheet data shows that IRIS Corporation Berhad had liabilities of RM152.7m due within a year, and liabilities of RM19.5m falling due after that. Offsetting this, it had RM78.9m in cash and RM96.5m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that IRIS Corporation Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the RM732.3m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, IRIS Corporation 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 it is IRIS Corporation 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 IRIS Corporation Berhad had a loss before interest and tax, and actually shrunk its revenue by 54%, to RM107m. To be frank that doesn't bode well.

So How Risky Is IRIS Corporation Berhad?

Although IRIS Corporation Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM10m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 2 warning signs for IRIS Corporation Berhad that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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