Is Signature International Berhad (KLSE:SIGN) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Signature International Berhad (KLSE:SIGN) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Signature International Berhad

What Is Signature International Berhad's Net Debt?

As you can see below, Signature International Berhad had RM38.2m of debt at March 2021, down from RM41.8m a year prior. But on the other hand it also has RM49.3m in cash, leading to a RM11.1m net cash position.

How Strong Is Signature International Berhad's Balance Sheet?

The latest balance sheet data shows that Signature International Berhad had liabilities of RM56.8m due within a year, and liabilities of RM35.3m falling due after that. On the other hand, it had cash of RM49.3m and RM59.6m worth of receivables due within a year. So it can boast RM16.8m 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!

Shareholders should be aware that Signature International Berhad's EBIT was down 80% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Signature International 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Signature International 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, Signature International Berhad actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Signature International Berhad has RM11.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 140% of that EBIT to free cash flow, bringing in -RM9.3m. So we are not troubled with Signature International Berhad's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Signature International Berhad that you should be aware of.

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. 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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