Does Southern Score Builders Berhad (KLSE:SSB8) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Southern Score Builders Berhad (KLSE:SSB8) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Southern Score Builders Berhad

What Is Southern Score Builders Berhad's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Southern Score Builders Berhad had debt of RM15.7m, up from RM4.99m in one year. But on the other hand it also has RM45.6m in cash, leading to a RM29.9m net cash position.

How Healthy Is Southern Score Builders Berhad's Balance Sheet?

The latest balance sheet data shows that Southern Score Builders Berhad had liabilities of RM77.3m due within a year, and liabilities of RM227.0k falling due after that. On the other hand, it had cash of RM45.6m and RM187.5m worth of receivables due within a year. So it can boast RM155.5m more liquid assets than total liabilities.

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

In addition to that, we're happy to report that Southern Score Builders Berhad has boosted its EBIT by 91%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Southern Score Builders Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Southern Score Builders 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. Considering the last three years, Southern Score Builders Berhad actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Southern Score Builders Berhad has net cash of RM29.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 91% over the last year. So is Southern Score Builders Berhad's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Southern Score Builders Berhad (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.