Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. 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. We note that Ireka Corporation Berhad (KLSE: IREKA) has debt on its balance sheet. But should shareholders worry about its use of debt?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. 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, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
Check out our latest analysis for Ireka Corporation Berhad
What is the debt of Ireka Corporation Berhad?
As you can see below, Ireka Corporation Berhad had a debt of RM62.2 million in December 2021, compared to RM109.7 million the previous year. However, he also had RM17.5 million in cash, so his net debt is RM44.7 million.
How healthy is Ireka Corporation Berhad’s balance sheet?
According to the latest published balance sheet, Ireka Corporation Berhad had liabilities of RM325.8 million due within 12 months and liabilities of RM14.7 million due beyond 12 months. As compensation for these obligations, it had cash of RM17.5 million and receivables valued at RM168.7 million due within 12 months. Thus, its liabilities total RM154.3 million more than the combination of its cash and short-term receivables.
Given that this deficit is actually greater than the company’s market capitalization of RM118.4 million, we believe shareholders should really be watching Ireka Corporation Berhad’s debt levels, like a parent watching their child. riding a bike for the first time. In the scenario where the company were to quickly clean up its balance sheet, it seems likely that shareholders would suffer significant dilution. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Ireka Corporation Berhad will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
On a 12-month basis, Ireka Corporation Berhad reported revenue of RM144 million, a gain of 18%, although it reported no earnings before interest and tax. This rate of growth is a little slow for our liking, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months, Ireka Corporation Berhad recorded a loss of earnings before interest and taxes (EBIT). Its EBIT loss was a whopping RM55m. Considering that alongside the liabilities mentioned above, we are nervous about the business. We would like to see strong improvements in the short term before getting too interested in the title. For example, we wouldn’t want to see a repeat of last year’s RM85m loss. And until then, we think it’s a risky stock. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. Know that Ireka Corporation Berhad shows 4 warning signs in our investment analysis and 1 of them is a little unpleasant…
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeright now.
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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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