Sanichi Technology Berhad (KLSE:SANICHI) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 thing to do when considering how much debt a business uses is to look at 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 December 2021 Sanichi Technology Berhad had RM40.5m of debt, an increase on RM38.1m, over one year. But it also has RM154.2m in cash to offset that, meaning it has RM113.7m net cash.

How Healthy Is Sanichi Technology Berhad's Balance Sheet?

According to the last reported balance sheet, Sanichi Technology Berhad had liabilities of RM34.8m due within 12 months, and liabilities of RM33.8m due beyond 12 months. On the other hand, it had cash of RM154.2m and RM53.6m worth of receivables due within a year. So it actually has RM139.2m 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). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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 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 had a loss before interest and tax, and actually shrunk its revenue by 25%, to RM18m. That makes us nervous, to say the least.

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 RM10m. 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. There's no doubt the next few years will be crucial to how the business matures. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Sanichi Technology Berhad you should be aware of, and 2 of them are concerning.

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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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.