Does Seacera Group Berhad (KLSE:SEACERA) 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.' 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 Seacera Group Berhad (KLSE:SEACERA) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. 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 Seacera Group Berhad

How Much Debt Does Seacera Group Berhad Carry?

As you can see below, Seacera Group Berhad had RM9.65m of debt at September 2021, down from RM24.2m a year prior. But it also has RM11.0m in cash to offset that, meaning it has RM1.38m net cash.

A Look At Seacera Group Berhad's Liabilities

We can see from the most recent balance sheet that Seacera Group Berhad had liabilities of RM48.5m falling due within a year, and liabilities of RM98.4m due beyond that. Offsetting these obligations, it had cash of RM11.0m as well as receivables valued at RM54.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM81.0m.

This deficit is considerable relative to its market capitalization of RM126.4m, so it does suggest shareholders should keep an eye on Seacera Group Berhad's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Seacera Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Seacera Group Berhad's EBIT was down 32% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Seacera Group 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Seacera Group Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last two years, Seacera Group Berhad burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While Seacera Group Berhad does have more liabilities than liquid assets, it also has net cash of RM1.38m. Despite its cash we think that Seacera Group Berhad seems to struggle to grow its EBIT, so we are wary of the stock. There's no doubt that we learn most about debt from the balance sheet. 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 4 warning signs for Seacera Group Berhad you should know about.

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.