Does SMIS Corporation Berhad (KLSE:SMISCOR) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, SMIS Corporation Berhad (KLSE:SMISCOR) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for SMIS Corporation Berhad

What Is SMIS Corporation Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that SMIS Corporation Berhad had debt of RM12.9m at the end of March 2022, a reduction from RM13.6m over a year. However, it also had RM10.4m in cash, and so its net debt is RM2.48m.

How Healthy Is SMIS Corporation Berhad's Balance Sheet?

According to the last reported balance sheet, SMIS Corporation Berhad had liabilities of RM33.8m due within 12 months, and liabilities of RM4.06m due beyond 12 months. Offsetting this, it had RM10.4m in cash and RM26.9m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to SMIS Corporation Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the RM27.6m company is short on cash, but still worth keeping an eye on the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SMIS Corporation 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.

In the last year SMIS Corporation Berhad's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months SMIS Corporation Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost RM143k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through RM507k of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for SMIS Corporation Berhad that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.