SMRT Holdings Berhad (KLSE:SMRT) Has A Pretty 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. As with many other companies SMRT Holdings Berhad (KLSE:SMRT) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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.

View our latest analysis for SMRT Holdings Berhad

What Is SMRT Holdings Berhad's Debt?

As you can see below, SMRT Holdings Berhad had RM11.4m of debt at June 2023, down from RM17.4m a year prior. However, it does have RM16.6m in cash offsetting this, leading to net cash of RM5.25m.

How Healthy Is SMRT Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that SMRT Holdings Berhad had liabilities of RM15.0m due within a year, and liabilities of RM10.6m falling due after that. Offsetting this, it had RM16.6m in cash and RM25.8m in receivables that were due within 12 months. So it actually has RM16.8m more liquid assets than total liabilities.

This short term liquidity is a sign that SMRT Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SMRT 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 SMRT Holdings Berhad's load is not too heavy, because its EBIT was down 59% 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 SMRT 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While SMRT 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. Happily for any shareholders, SMRT Holdings Berhad actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that SMRT Holdings Berhad has net cash of RM5.25m, as well as more liquid assets than liabilities. The cherry on top was that in converted 106% of that EBIT to free cash flow, bringing in -RM2.4m. So we don't have any problem with SMRT Holdings Berhad's use of debt. 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 instance, we've identified 4 warning signs for SMRT Holdings Berhad (1 doesn't sit too well with us) you should be aware of.

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. 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.