Is Sarawak Cable Berhad (KLSE:SCABLE) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Sarawak Cable Berhad (KLSE:SCABLE) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sarawak Cable Berhad

What Is Sarawak Cable Berhad's Debt?

As you can see below, Sarawak Cable Berhad had RM468.3m of debt at June 2021, down from RM516.3m a year prior. However, because it has a cash reserve of RM24.6m, its net debt is less, at about RM443.7m.

A Look At Sarawak Cable Berhad's Liabilities

According to the last reported balance sheet, Sarawak Cable Berhad had liabilities of RM536.6m due within 12 months, and liabilities of RM90.2m due beyond 12 months. On the other hand, it had cash of RM24.6m and RM194.7m worth of receivables due within a year. So its liabilities total RM407.5m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the RM163.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Sarawak Cable Berhad would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sarawak Cable 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.

Over 12 months, Sarawak Cable Berhad made a loss at the EBIT level, and saw its revenue drop to RM603m, which is a fall of 9.8%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Sarawak Cable Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost RM3.6m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of RM19m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Sarawak Cable Berhad (of which 1 is a bit concerning!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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