These 4 Measures Indicate That SMIS Corporation Berhad (KLSE:SMISCOR) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that SMIS Corporation Berhad (KLSE:SMISCOR) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SMIS Corporation Berhad

What Is SMIS Corporation Berhad's Debt?

As you can see below, SMIS Corporation Berhad had RM10.7m of debt at September 2022, down from RM13.1m a year prior. But on the other hand it also has RM11.9m in cash, leading to a RM1.16m net cash position.

How Strong Is SMIS Corporation Berhad's Balance Sheet?

According to the last reported balance sheet, SMIS Corporation Berhad had liabilities of RM33.0m due within 12 months, and liabilities of RM4.22m due beyond 12 months. Offsetting these obligations, it had cash of RM11.9m as well as receivables valued at RM47.7m due within 12 months. So it can boast RM22.3m more liquid assets than total liabilities.

This excess liquidity is a great indication that SMIS Corporation Berhad's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, SMIS Corporation Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Although SMIS Corporation Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM24m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SMIS Corporation 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. SMIS Corporation Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, SMIS Corporation Berhad barely recorded positive free cash flow, in total. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that SMIS Corporation Berhad has net cash of RM1.16m, as well as more liquid assets than liabilities. So is SMIS Corporation Berhad's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for SMIS Corporation Berhad you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.