Sarawak Cable Berhad (KLSE:SCABLE) 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. Importantly, Sarawak Cable Berhad (KLSE:SCABLE) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sarawak Cable Berhad

What Is Sarawak Cable Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Sarawak Cable Berhad had RM467.6m of debt in December 2020, down from RM527.6m, one year before. On the flip side, it has RM42.5m in cash leading to net debt of about RM425.1m.

How Healthy Is Sarawak Cable Berhad's Balance Sheet?

According to the last reported balance sheet, Sarawak Cable Berhad had liabilities of RM506.1m due within 12 months, and liabilities of RM104.2m due beyond 12 months. On the other hand, it had cash of RM42.5m and RM188.3m worth of receivables due within a year. So it has liabilities totalling RM379.5m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM137.9m 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. At the end of the day, Sarawak Cable Berhad would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sarawak Cable 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 Sarawak Cable Berhad had a loss before interest and tax, and actually shrunk its revenue by 23%, to RM609m. To be frank that doesn't bode well.

Caveat Emptor

While Sarawak Cable Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at RM3.9m. 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 since it is low on liquid assets, and made a loss of RM23m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. Case in point: We've spotted 3 warning signs for Sarawak Cable Berhad you should be aware of, and 1 of them is concerning.

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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