SMRT Holdings Berhad (KLSE:SMRT) Has Debt But No Earnings; Should You Worry?

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 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. Importantly, SMRT Holdings Berhad (KLSE:SMRT) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SMRT Holdings Berhad

What Is SMRT Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 SMRT Holdings Berhad had debt of RM28.4m, up from RM19.3m in one year. However, it does have RM17.3m in cash offsetting this, leading to net debt of about RM11.1m.

How Healthy Is SMRT Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that SMRT Holdings Berhad had liabilities of RM108.9m due within a year, and liabilities of RM272.9m falling due after that. Offsetting this, it had RM17.3m in cash and RM59.7m in receivables that were due within 12 months. So its liabilities total RM304.9m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM52.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, SMRT Holdings Berhad would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SMRT Holdings Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year SMRT Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 4.8%, to RM134m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months SMRT Holdings Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM14m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost RM34m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. 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. Be aware that SMRT Holdings Berhad is showing 2 warning signs in our investment analysis , you should know about...

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. 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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