Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk’. So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We note that Saudee Group Berhad (KLSE:SAUDEE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Saudee Group Berhad’s Net Debt?
The image below, which you can click on for greater detail, shows that Saudee Group Berhad had debt of RM27.6m at the end of October 2019, a reduction from RM34.0m over a year. On the flip side, it has RM4.87m in cash leading to net debt of about RM22.7m.
How Strong Is Saudee Group Berhad’s Balance Sheet?
We can see from the most recent balance sheet that Saudee Group Berhad had liabilities of RM35.9m falling due within a year, and liabilities of RM6.70m due beyond that. Offsetting these obligations, it had cash of RM4.87m as well as receivables valued at RM18.2m due within 12 months. So its liabilities total RM19.5m more than the combination of its cash and short-term receivables.
Saudee Group Berhad has a market capitalization of RM37.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it’s clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Saudee Group 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.
Over 12 months, Saudee Group Berhad reported revenue of RM77m, which is a gain of 3.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Importantly, Saudee Group Berhad had negative earnings before interest and tax (EBIT), over the last year. Its EBIT loss was a whopping RM4.2m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of RM4.4m and a profit of RM304k. So one might argue that there’s still a chance it can get things on the right track. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. Take risks, for example – Saudee Group Berhad has 5 warning signs (and 2 which are a bit concerning) we think you should know about.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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