Health Check: How Prudently Does Sapura Energy Berhad (KLSE:SAPNRG) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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, Sapura Energy Berhad (KLSE:SAPNRG) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sapura Energy Berhad

How Much Debt Does Sapura Energy Berhad Carry?

The chart below, which you can click on for greater detail, shows that Sapura Energy Berhad had RM10.7b in debt in January 2022; about the same as the year before. However, it does have RM717.8m in cash offsetting this, leading to net debt of about RM9.94b.

How Healthy Is Sapura Energy Berhad's Balance Sheet?

We can see from the most recent balance sheet that Sapura Energy Berhad had liabilities of RM15.8b falling due within a year, and liabilities of RM143.0m due beyond that. On the other hand, it had cash of RM717.8m and RM2.18b worth of receivables due within a year. So it has liabilities totalling RM13.1b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM638.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Sapura Energy Berhad would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Sapura Energy 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.

In the last year Sapura Energy Berhad had a loss before interest and tax, and actually shrunk its revenue by 23%, to RM4.1b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Sapura Energy Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM2.8b at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost RM8.9b in the last year. So we think buying this stock is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Sapura Energy Berhad that you should be aware of.

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. 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.