We Think Sapura Industrial Berhad (KLSE:SAPIND) Has A Fair Chunk Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Sapura Industrial Berhad (KLSE:SAPIND) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sapura Industrial Berhad

What Is Sapura Industrial Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Sapura Industrial Berhad had RM34.8m of debt in October 2020, down from RM40.0m, one year before. On the flip side, it has RM31.9m in cash leading to net debt of about RM2.86m.

How Healthy Is Sapura Industrial Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sapura Industrial Berhad had liabilities of RM35.4m due within 12 months and liabilities of RM37.2m due beyond that. Offsetting these obligations, it had cash of RM31.9m as well as receivables valued at RM35.8m due within 12 months. So its liabilities total RM4.90m more than the combination of its cash and short-term receivables.

Of course, Sapura Industrial Berhad has a market capitalization of RM54.6m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sapura Industrial Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Sapura Industrial Berhad made a loss at the EBIT level, and saw its revenue drop to RM159m, which is a fall of 34%. To be frank that doesn't bode well.

Caveat Emptor

While Sapura Industrial Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost RM462k at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of RM1.1m. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Sapura Industrial Berhad has 4 warning signs (and 1 which is a bit unpleasant) 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.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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