Is Sanichi Technology Berhad (KLSE:SANICHI) Using Debt In A Risky Way?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Sanichi Technology Berhad (KLSE:SANICHI) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Sanichi Technology Berhad

What Is Sanichi Technology Berhad's Net Debt?

As you can see below, at the end of June 2020, Sanichi Technology Berhad had RM38.3m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds RM99.4m in cash, so it actually has RM61.1m net cash.

How Healthy Is Sanichi Technology Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sanichi Technology Berhad had liabilities of RM46.3m due within 12 months and liabilities of RM38.5m due beyond that. Offsetting this, it had RM99.4m in cash and RM64.3m in receivables that were due within 12 months. So it actually has RM78.9m 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). On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Sanichi Technology Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sanichi Technology Berhad's earnings that will influence how the balance sheet holds up in the future. 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 RM27m, which is a gain of 22%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Sanichi Technology Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Sanichi Technology Berhad had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through RM50m of cash and made a loss of RM14m. But the saving grace is the RM61.1m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Sanichi Technology Berhad's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Sanichi Technology Berhad (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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. 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.
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