Is Sanichi Technology Berhad (KLSE:SANICHI) Using Too Much Debt?

Warren Buffett famously said, '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. Importantly, Sanichi Technology Berhad (KLSE:SANICHI) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sanichi Technology Berhad

How Much Debt Does Sanichi Technology Berhad Carry?

As you can see below, Sanichi Technology Berhad had RM38.5m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM135.7m in cash offsetting this, leading to net cash of RM97.2m.

How Healthy Is Sanichi Technology Berhad's Balance Sheet?

The latest balance sheet data shows that Sanichi Technology Berhad had liabilities of RM61.8m due within a year, and liabilities of RM32.9m falling due after that. Offsetting these obligations, it had cash of RM135.7m as well as receivables valued at RM53.0m due within 12 months. So it actually has RM94.1m more liquid assets than total liabilities.

This surplus liquidity suggests that Sanichi Technology Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. 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.

In the last year Sanichi Technology Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to RM21m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Sanichi Technology Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Sanichi Technology Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM914k and booked a RM92m accounting loss. But the saving grace is the RM97.2m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Sanichi Technology Berhad may be on a path to profitability. 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. To that end, you should learn about the 4 warning signs we've spotted with Sanichi Technology Berhad (including 3 which make us uncomfortable) .

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. 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.