Southern Score Builders Berhad (KLSE:SSB8) Has A Rock Solid 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. As with many other companies Southern Score Builders Berhad (KLSE:SSB8) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Southern Score Builders Berhad

How Much Debt Does Southern Score Builders Berhad Carry?

As you can see below, at the end of December 2023, Southern Score Builders Berhad had RM15.0m of debt, up from none a year ago. Click the image for more detail. However, it does have RM51.9m in cash offsetting this, leading to net cash of RM36.9m.

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

According to the last reported balance sheet, Southern Score Builders Berhad had liabilities of RM57.5m due within 12 months, and liabilities of RM347.0k due beyond 12 months. Offsetting this, it had RM51.9m in cash and RM156.5m in receivables that were due within 12 months. So it can boast RM150.5m more liquid assets than total liabilities.

This excess liquidity suggests that Southern Score Builders Berhad is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. 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.

On top of that, Southern Score Builders Berhad grew its EBIT by 70% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Southern Score Builders 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Southern Score Builders Berhad reported free cash flow worth 5.6% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Southern Score Builders Berhad has RM36.9m in net cash and a decent-looking balance sheet. And we liked the look of last year's 70% year-on-year EBIT growth. So we don't think Southern Score Builders Berhad's use of debt is 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. For example - Southern Score Builders Berhad has 2 warning signs we think 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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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.