We Think Sealink International Berhad (KLSE:SEALINK) Has A Fair Chunk Of Debt

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. As with many other companies Sealink International Berhad (KLSE:SEALINK) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

What Is Sealink International Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Sealink International Berhad had RM94.9m of debt in December 2020, down from RM110.2m, one year before. However, it also had RM5.30m in cash, and so its net debt is RM89.6m.

How Strong Is Sealink International Berhad's Balance Sheet?

The latest balance sheet data shows that Sealink International Berhad had liabilities of RM105.6m due within a year, and liabilities of RM45.5m falling due after that. Offsetting these obligations, it had cash of RM5.30m as well as receivables valued at RM36.1m due within 12 months. So its liabilities total RM109.7m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of RM150.0m, so it does suggest shareholders should keep an eye on Sealink International Berhad's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Sealink International 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.

Over 12 months, Sealink International Berhad made a loss at the EBIT level, and saw its revenue drop to RM50m, which is a fall of 25%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Sealink International Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM40m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of RM45m into a profit. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Sealink International Berhad you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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