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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Sanichi Technology Berhad (KLSE:SANICHI) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Sanichi Technology Berhad had RM37.0m of debt in March 2023, down from RM40.3m, one year before. But on the other hand it also has RM96.8m in cash, leading to a RM59.8m net cash position.

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 RM39.7m falling due within a year, and liabilities of RM30.9m due beyond that. Offsetting these obligations, it had cash of RM96.8m as well as receivables valued at RM43.5m due within 12 months. So it can boast RM69.7m 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. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to RM24m. With any luck the company will be able to grow its way to profitability.

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 RM18m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Given it also grew revenue by 32% over the last year, we think there's a good chance the company is on track. That growth could mean this is one stock well worth watching. 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. To that end, you should be aware of the 3 warning signs we've spotted with Sanichi Technology Berhad .

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.