Does Solarvest Holdings Berhad (KLSE:SLVEST) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Solarvest Holdings Berhad (KLSE:SLVEST) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Solarvest Holdings Berhad

What Is Solarvest Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Solarvest Holdings Berhad had debt of RM12.9m, up from RM10.9m in one year. However, its balance sheet shows it holds RM32.4m in cash, so it actually has RM19.5m net cash.

How Strong Is Solarvest Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Solarvest Holdings Berhad had liabilities of RM61.3m due within a year, and liabilities of RM24.6m falling due after that. On the other hand, it had cash of RM32.4m and RM161.3m worth of receivables due within a year. So it actually has RM107.8m more liquid assets than total liabilities.

It's good to see that Solarvest Holdings Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Solarvest Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Solarvest Holdings Berhad's load is not too heavy, because its EBIT was down 38% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Solarvest Holdings Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Solarvest Holdings Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Solarvest Holdings Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Solarvest Holdings Berhad has net cash of RM19.5m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Solarvest Holdings Berhad's balance sheet. 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 Solarvest Holdings Berhad (of which 1 can't be ignored!) you should know about.

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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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.