Is Sarawak Cable Berhad (KLSE:SCABLE) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Sarawak Cable Berhad (KLSE:SCABLE) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sarawak Cable Berhad

How Much Debt Does Sarawak Cable Berhad Carry?

As you can see below, Sarawak Cable Berhad had RM476.5m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has RM31.5m in cash leading to net debt of about RM445.0m.

How Strong Is Sarawak Cable Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sarawak Cable Berhad had liabilities of RM556.2m due within 12 months and liabilities of RM89.6m due beyond that. Offsetting these obligations, it had cash of RM31.5m as well as receivables valued at RM202.5m due within 12 months. So it has liabilities totalling RM411.7m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM75.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Sarawak Cable Berhad would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Sarawak Cable 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.

In the last year Sarawak Cable Berhad had a loss before interest and tax, and actually shrunk its revenue by 23%, to RM531m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Sarawak Cable Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM27m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through RM6.7m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Sarawak Cable Berhad (1 is significant) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.