Is Saudee Group Berhad (KLSE:SAUDEE) Using Too Much 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.' 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. We can see that Saudee Group Berhad (KLSE:SAUDEE) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Saudee Group Berhad

How Much Debt Does Saudee Group Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Saudee Group Berhad had RM21.3m of debt in October 2020, down from RM27.6m, one year before. On the flip side, it has RM5.24m in cash leading to net debt of about RM16.0m.

How Healthy Is Saudee Group Berhad's Balance Sheet?

According to the last reported balance sheet, Saudee Group Berhad had liabilities of RM28.7m due within 12 months, and liabilities of RM7.11m due beyond 12 months. Offsetting these obligations, it had cash of RM5.24m as well as receivables valued at RM22.1m due within 12 months. So its liabilities total RM8.51m more than the combination of its cash and short-term receivables.

Given Saudee Group Berhad has a market capitalization of RM78.1m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Saudee Group 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 Saudee Group Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 2.7%, to RM80m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Saudee Group Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM2.2m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through RM2.2m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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 for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with Saudee Group Berhad (at least 2 which are significant) , and understanding them should be part of your investment process.

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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