Is Signature International Berhad (KLSE:SIGN) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Signature International Berhad (KLSE:SIGN) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Signature International Berhad

How Much Debt Does Signature International Berhad Carry?

As you can see below, Signature International Berhad had RM40.9m of debt at September 2020, down from RM44.7m a year prior. However, its balance sheet shows it holds RM62.4m in cash, so it actually has RM21.5m net cash.

A Look At Signature International Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Signature International Berhad had liabilities of RM68.3m due within 12 months and liabilities of RM38.3m due beyond that. Offsetting this, it had RM62.4m in cash and RM61.7m in receivables that were due within 12 months. So it actually has RM17.5m more liquid assets than total liabilities.

This surplus suggests that Signature International Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Signature International Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Signature International Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Signature International Berhad made a loss at the EBIT level, and saw its revenue drop to RM115m, which is a fall of 20%. To be frank that doesn't bode well.

So How Risky Is Signature International Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Signature International Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM8.6m and booked a RM3.7m accounting loss. With only RM21.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. We've identified 3 warning signs with Signature International Berhad , 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.

If you’re looking to trade Signature International Berhad, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.