Is CN Asia Corporation Bhd (KLSE:CNASIA) using too much debt?
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies CN Asia Corporation Bhd (KLSE:CNASIA) uses debt. But the real question is whether this debt makes the business risky.
When is debt a problem?
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 think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for CN Asia Corporation Bhd
What is CN Asia Corporation Bhd’s debt?
As you can see below, at the end of March 2022, CN Asia Corporation Bhd had a debt of RM8.09 million, compared to RM2.51 million a year ago. Click on the image for more details. But on the other hand, he also has RM12.5 million in cash, resulting in a net cash position of RM4.46 million.
A look at the liabilities of CN Asia Corporation Bhd
According to the latest published balance sheet, CN Asia Corporation Bhd had liabilities of RM7.34 million due within 12 months and liabilities of RM3.86 million due beyond 12 months. In return, he had RM12.5 million in cash and RM22.6 million in debt due within 12 months. Thus, he can boast of having RM24.0 million more liquid assets than total Passives.
This luscious liquidity means CN Asia Corporation Bhd’s balance sheet is as strong as a giant sequoia. With that in mind, one could argue that its track record means the company is capable of dealing with some adversity. Simply put, the fact that CN Asia Corporation Bhd has more cash than debt is arguably a good indication that it can safely manage its debt. 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 CN Asia Corporation Bhd 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.
Over the past year, CN Asia Corporation Bhd recorded a loss before interest and tax and actually reduced its revenue by 28% to RM11 million. To be honest, that doesn’t bode well.
So how risky is CN Asia Corporation Bhd?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And we note that CN Asia Corporation Bhd recorded a loss of earnings before interest and taxes (EBIT) over the past year. Indeed, at that time, he burned RM25 million of cash and suffered a loss of RM13 million. Since it only has net cash of RM4.46 million, the company may need to raise more capital if it does not break even soon. Overall, its balance sheet doesn’t look too risky, at the moment, but we’re still cautious until we see positive free cash flow. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that CN Asia Corporation Bhd shows 5 warning signs in our investment analysis and 1 of them cannot be ignored…
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.