Does Sanichi Technology Berhad (KLSE:SANICHI) 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 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 can see that Sanichi Technology Berhad (KLSE:SANICHI) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sanichi Technology Berhad

How Much Debt Does Sanichi Technology Berhad Carry?

The image below, which you can click on for greater detail, shows that Sanichi Technology Berhad had debt of RM37.3m at the end of December 2022, a reduction from RM40.5m over a year. However, its balance sheet shows it holds RM138.9m in cash, so it actually has RM101.6m net cash.

A Look At Sanichi Technology Berhad's Liabilities

According to the last reported balance sheet, Sanichi Technology Berhad had liabilities of RM53.2m due within 12 months, and liabilities of RM31.5m due beyond 12 months. Offsetting this, it had RM138.9m in cash and RM44.9m in receivables that were due within 12 months. So it can boast RM99.1m more liquid assets than total liabilities.

This surplus strongly suggests that Sanichi Technology Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Sanichi Technology Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Sanichi Technology 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.

In the last year Sanichi Technology Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to RM23m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Sanichi Technology Berhad?

Although Sanichi Technology Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM20m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Given it also grew revenue by 30% over the last year, we think there's a good chance the company is on track. So this may well be an interesting business to watch grow. 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. Be aware that Sanichi Technology Berhad is showing 3 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.