Does Superlon Holdings Berhad (KLSE:SUPERLN) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Superlon Holdings Berhad (KLSE:SUPERLN) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Superlon Holdings Berhad

What Is Superlon Holdings Berhad's Net Debt?

As you can see below, Superlon Holdings Berhad had RM8.92m of debt at October 2020, down from RM13.4m a year prior. But it also has RM27.8m in cash to offset that, meaning it has RM18.9m net cash.

How Strong Is Superlon Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Superlon Holdings Berhad had liabilities of RM14.0m due within a year, and liabilities of RM13.5m falling due after that. Offsetting these obligations, it had cash of RM27.8m as well as receivables valued at RM20.0m due within 12 months. So it actually has RM20.4m more liquid assets than total liabilities.

This surplus suggests that Superlon Holdings Berhad is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Superlon Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Superlon Holdings Berhad grew its EBIT by 6.8% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Superlon Holdings Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Superlon 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. Looking at the most recent three years, Superlon Holdings Berhad recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Superlon Holdings Berhad has RM18.9m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 6.8% in the last twelve months. So we don't think Superlon Holdings 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, we've discovered 2 warning signs for Superlon Holdings Berhad that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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