Does Box-Pak (Malaysia) Bhd (KLSE:BOXPAK) use debt in a risky way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Above all, Box-Pak (Malaysia) Bhd. (KLSE: BOXPAK) is in debt. But the real question is whether this debt makes the business risky.

What risk does debt carry?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for Box-Pak (Malaysia) Bhd

How much debt does Box-Pak (Malaysia) Bhd have?

The graph below, which you can click on for more details, shows that Box-Pak (Malaysia) Bhd had a debt of RM247.7 million in March 2022; about the same as the previous year. However, he has RM28.2 million in cash to offset this, resulting in a net debt of around RM219.5 million.

KLSE: BOXPAK Debt to Equity June 17, 2022

A look at the responsibilities of Box-Pak (Malaysia) Bhd

The latest balance sheet data shows that Box-Pak (Malaysia) Bhd had liabilities of RM412.4 million due within one year, and liabilities of RM50.2 million falling due thereafter. On the other hand, it had liquid assets of RM28.2 million and RM199.4 million of receivables due within the year. Thus, its liabilities outweigh the sum of its cash and receivables (short term) of RM235.1 million.

This deficit casts a shadow over the RM150.1m company, like a towering colossus of mere mortals. So we definitely think shareholders need to watch this one closely. After all, Box-Pak (Malaysia) Bhd would likely need a major recapitalization if it were to pay its creditors today. When analyzing debt levels, the balance sheet is the obvious starting point. But it is Box-Pak (Malaysia) Bhd’s earnings that will influence the balance sheet going forward. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Over the past year, Box-Pak (Malaysia) Bhd’s revenues have been fairly stable and achieved negative EBIT. While that’s not too bad, we’d rather see growth.

Caveat Emptor

It is important to note that Box-Pak (Malaysia) Bhd has recorded a loss of Earnings Before Interest and Taxes (EBIT) over the past year. Its EBIT loss was a whopping RM22m. When we look at this alongside significant liabilities, we are not particularly confident about the business. We would like to see strong improvements in the short term before getting too interested in the title. Not least because it had a negative free cash flow of RM26 million in the last twelve months. So suffice it to say that we consider the stock to be risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. We have identified 3 warning signs with Box-Pak (Malaysia) Bhd (at least 2 which should not be ignored), and understanding them should be part of your investment process.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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