Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Sanichi Technology Berhad's Net Debt?
The chart below, which you can click on for greater detail, shows that Sanichi Technology Berhad had RM38.1m in debt in December 2020; about the same as the year before. But it also has RM137.1m in cash to offset that, meaning it has RM99.0m net cash.
How Healthy Is Sanichi Technology Berhad's Balance Sheet?
We can see from the most recent balance sheet that Sanichi Technology Berhad had liabilities of RM26.7m falling due within a year, and liabilities of RM34.2m due beyond that. On the other hand, it had cash of RM137.1m and RM51.6m worth of receivables due within a year. So it can boast RM127.9m 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. There's no doubt that we learn most about debt from the balance sheet. 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.
Over 12 months, Sanichi Technology Berhad reported revenue of RM23m, which is a gain of 8.2%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
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 RM19m. 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. The next few years will be important as the business matures. 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. Case in point: We've spotted 4 warning signs for Sanichi Technology Berhad you should be aware of, and 2 of them make us uncomfortable.
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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