Health Check: How Prudently Does Sanichi Technology Berhad (KLSE:SANICHI) Use 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Sanichi Technology Berhad (KLSE:SANICHI) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sanichi Technology Berhad

What Is Sanichi Technology Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Sanichi Technology Berhad had RM40.1m of debt, an increase on RM38.3m, over one year. But on the other hand it also has RM184.2m in cash, leading to a RM144.1m net cash position.

A Look At Sanichi Technology Berhad's Liabilities

The latest balance sheet data shows that Sanichi Technology Berhad had liabilities of RM46.5m due within a year, and liabilities of RM35.4m falling due after that. Offsetting this, it had RM184.2m in cash and RM30.0m in receivables that were due within 12 months. So it can boast RM132.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Sanichi Technology Berhad's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Sanichi Technology Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sanichi Technology Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Sanichi Technology Berhad had a loss before interest and tax, and actually shrunk its revenue by 39%, to RM17m. That makes us nervous, to say the least.

So How Risky Is Sanichi Technology Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Sanichi Technology Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM43m and booked a RM14m accounting loss. But the saving grace is the RM144.1m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 5 warning signs for Sanichi Technology Berhad (of which 2 don't sit too well with us!) 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're looking for stocks to buy, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.