Does Sarawak Consolidated Industries Berhad (KLSE:SCIB) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Sarawak Consolidated Industries Berhad (KLSE:SCIB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Sarawak Consolidated Industries Berhad

What Is Sarawak Consolidated Industries Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Sarawak Consolidated Industries Berhad had debt of RM45.9m, up from RM42.6m in one year. However, it does have RM36.2m in cash offsetting this, leading to net debt of about RM9.65m.

How Healthy Is Sarawak Consolidated Industries Berhad's Balance Sheet?

According to the last reported balance sheet, Sarawak Consolidated Industries Berhad had liabilities of RM668.0m due within 12 months, and liabilities of RM25.2m due beyond 12 months. Offsetting these obligations, it had cash of RM36.2m as well as receivables valued at RM660.1m due within 12 months. So these liquid assets roughly match the total liabilities.

This surplus suggests that Sarawak Consolidated Industries Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sarawak Consolidated Industries 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 Consolidated Industries Berhad had a loss before interest and tax, and actually shrunk its revenue by 3.2%, to RM128m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Sarawak Consolidated Industries Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM51m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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. We've identified 3 warning signs with Sarawak Consolidated Industries Berhad , and understanding them should be part of your investment process.

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.