Would Sarawak Consolidated Industries Berhad (KLSE:SCIB) Be Better Off With Less Debt?

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. We note that Sarawak Consolidated Industries Berhad (KLSE:SCIB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View 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 Sarawak Consolidated Industries Berhad had debt of RM39.2m at the end of March 2023, a reduction from RM44.9m over a year. However, because it has a cash reserve of RM19.7m, its net debt is less, at about RM19.5m.

A Look At Sarawak Consolidated Industries Berhad's Liabilities

The latest balance sheet data shows that Sarawak Consolidated Industries Berhad had liabilities of RM66.3m due within a year, and liabilities of RM23.3m falling due after that. On the other hand, it had cash of RM19.7m and RM79.7m worth of receivables due within a year. So it can boast RM9.72m more liquid assets than total liabilities.

This surplus suggests that Sarawak Consolidated Industries Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. There's no doubt that we learn most about debt from the balance sheet. But it is Sarawak Consolidated Industries 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.

Over 12 months, Sarawak Consolidated Industries Berhad made a loss at the EBIT level, and saw its revenue drop to RM125m, which is a fall of 3.5%. We would much prefer see growth.

Caveat Emptor

Importantly, Sarawak Consolidated Industries Berhad had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM48m. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Sarawak Consolidated Industries Berhad (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.