Is SEG International Bhd (KLSE:SEG) A Risky Investment?

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 SEG International Bhd (KLSE:SEG) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SEG International Bhd

What Is SEG International Bhd's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 SEG International Bhd had debt of RM35.1m, up from RM30.1m in one year. But it also has RM84.7m in cash to offset that, meaning it has RM49.6m net cash.

How Healthy Is SEG International Bhd's Balance Sheet?

According to the last reported balance sheet, SEG International Bhd had liabilities of RM119.6m due within 12 months, and liabilities of RM139.6m due beyond 12 months. On the other hand, it had cash of RM84.7m and RM30.9m worth of receivables due within a year. So its liabilities total RM143.5m more than the combination of its cash and short-term receivables.

Given SEG International Bhd has a market capitalization of RM784.5m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, SEG International Bhd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, SEG International Bhd saw its EBIT drop by 3.6% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is SEG International Bhd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. SEG International Bhd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, SEG International Bhd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While SEG International Bhd does have more liabilities than liquid assets, it also has net cash of RM49.6m. And it impressed us with free cash flow of RM67m, being 104% of its EBIT. So we are not troubled with SEG International Bhd'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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for SEG International Bhd you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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