Solarvest Holdings Berhad (KLSE:SLVEST) Seems To Use Debt Quite Sensibly

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 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. We note that Solarvest Holdings Berhad (KLSE:SLVEST) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Solarvest Holdings Berhad

How Much Debt Does Solarvest Holdings Berhad Carry?

As you can see below, Solarvest Holdings Berhad had RM14.2m of debt at December 2020, down from RM15.9m a year prior. But it also has RM63.9m in cash to offset that, meaning it has RM49.7m net cash.

How Strong Is Solarvest Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Solarvest Holdings Berhad had liabilities of RM76.7m due within 12 months, and liabilities of RM14.8m due beyond 12 months. Offsetting these obligations, it had cash of RM63.9m as well as receivables valued at RM102.6m due within 12 months. So it actually has RM75.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Solarvest Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Solarvest Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

While Solarvest Holdings Berhad doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Solarvest Holdings Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Solarvest Holdings 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. Looking at the most recent three years, Solarvest Holdings Berhad recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Solarvest Holdings Berhad has net cash of RM49.7m, as well as more liquid assets than liabilities. So we don't have any problem with Solarvest Holdings Berhad's use of debt. 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. For instance, we've identified 3 warning signs for Solarvest Holdings Berhad (1 is a bit unpleasant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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