We Think Superlon Holdings Berhad (KLSE:SUPERLN) Can Stay On Top Of Its Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Superlon Holdings Berhad (KLSE:SUPERLN) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Superlon Holdings Berhad

How Much Debt Does Superlon Holdings Berhad Carry?

As you can see below, at the end of January 2023, Superlon Holdings Berhad had RM27.0m of debt, up from RM12.1m a year ago. Click the image for more detail. However, it does have RM50.7m in cash offsetting this, leading to net cash of RM23.8m.

How Healthy Is Superlon Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Superlon Holdings Berhad had liabilities of RM10.7m due within 12 months, and liabilities of RM30.8m due beyond 12 months. Offsetting these obligations, it had cash of RM50.7m as well as receivables valued at RM19.1m due within 12 months. So it actually has RM28.3m more liquid assets than total liabilities.

It's good to see that Superlon 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, Superlon 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 Superlon Holdings Berhad's load is not too heavy, because its EBIT was down 61% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is Superlon Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. 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, 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. Over the last three years, Superlon Holdings Berhad actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Superlon Holdings Berhad has net cash of RM23.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 124% of that EBIT to free cash flow, bringing in RM17m. So we are not troubled with Superlon Holdings Berhad's debt use. 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 example, we've discovered 3 warning signs for Superlon Holdings Berhad (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.