Howard Marks put it right when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk that concerns me … and every investor I practice.” know worries ”. So it can be obvious that you need to factor in debt, when you think about how risky a given stock is, because too much debt can sink a business. We notice that Advance Synergy Berhad (KLSE: ASB) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
Why is debt risky?
Generally speaking, debt only becomes a real problem when a business cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting shareholders because lenders are forcing them to raise capital at a difficult price. Of course, debt can be an important tool in businesses, especially large cap companies. When we think of a business’s use of debt, we first look at cash flow and debt together.
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How much debt is Advance Synergy Berhad?
The image below, which you can click for more details, shows that in December 2020, Advance Synergy Berhad had a debt of RM 57.5 million, compared to RM 48.8 million in one year. . But he also has RM103.0million in cash to make up for this, which means he has a net cash of RM45.5million.
How healthy is Advance Synergy Berhad’s track record?
Zooming in on the latest balance sheet data, we can see that Advance Synergy Berhad had liabilities of RM 83.9 million due within 12 months and RM 103.6 million liabilities beyond. In return, he had RM 103.0 million in cash and RM 59.7 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of RM24.8 million.
Considering that the listed shares of Advance Synergy Berhad are worth a total of RM 139.4 million, it seems unlikely that this level of liabilities is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. While she has some liabilities to note, Advance Synergy Berhad also has more cash than debt, so we’re pretty confident that she can handle her debt safely. There is no doubt that we learn the most about debt from the balance sheet. But it is the benefits of Advance Synergy Berhad that will influence the performance of the balance sheet in the future. So when you consider debt, it’s really worth looking at the profit trend. Click here for an interactive snapshot.
Over the past year, Advance Synergy Berhad recorded a loss before interest and taxes and in fact reduced its income by 57%, to RM117 million. To be frank, that doesn’t bode well.
So how risky is Advance Synergy Berhad?
We are convinced that loss-making companies are, in general, riskier than profitable companies. And over the past year, Advance Synergy Berhad has recorded a loss of earnings before interest and taxes (EBIT), frankly. Indeed, during this period, he burned RM15 million in silver and made a loss of RM34 million. With only RM 45.5 million on the balance sheet, it looks like we will have to raise capital again soon. In summary, we’re a little skeptical about this one, as it looks pretty risky in the absence of free cash flow. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 1 warning sign for Advance Synergy Berhad which you should be aware of before investing here.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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