Is Sealink International Berhad (KLSE:SEALINK) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Sealink International Berhad (KLSE:SEALINK) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sealink International Berhad

How Much Debt Does Sealink International Berhad Carry?

As you can see below, Sealink International Berhad had RM51.6m of debt at June 2023, down from RM67.3m a year prior. On the flip side, it has RM11.2m in cash leading to net debt of about RM40.4m.

How Healthy Is Sealink International Berhad's Balance Sheet?

According to the last reported balance sheet, Sealink International Berhad had liabilities of RM87.5m due within 12 months, and liabilities of RM29.5m due beyond 12 months. Offsetting this, it had RM11.2m in cash and RM30.2m in receivables that were due within 12 months. So it has liabilities totalling RM75.5m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of RM60.0m, we think shareholders really should watch Sealink International Berhad's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sealink International 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, Sealink International Berhad reported revenue of RM91m, which is a gain of 107%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, Sealink International Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM8.7m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of RM11m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Sealink International Berhad (of which 2 shouldn't be ignored!) 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.