Is Sin Heng Chan (Malaya) Berhad (KLSE:SHCHAN) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Sin Heng Chan (Malaya) Berhad (KLSE:SHCHAN) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sin Heng Chan (Malaya) Berhad

How Much Debt Does Sin Heng Chan (Malaya) Berhad Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Sin Heng Chan (Malaya) Berhad had debt of RM168.0m, up from RM157.5m in one year. However, it also had RM46.4m in cash, and so its net debt is RM121.6m.

How Strong Is Sin Heng Chan (Malaya) Berhad's Balance Sheet?

The latest balance sheet data shows that Sin Heng Chan (Malaya) Berhad had liabilities of RM30.5m due within a year, and liabilities of RM161.1m falling due after that. Offsetting this, it had RM46.4m in cash and RM13.8m in receivables that were due within 12 months. So its liabilities total RM131.3m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of RM93.7m, we think shareholders really should watch Sin Heng Chan (Malaya) Berhad's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sin Heng Chan (Malaya) Berhad'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.

In the last year Sin Heng Chan (Malaya) Berhad had a loss before interest and tax, and actually shrunk its revenue by 22%, to RM44m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Sin Heng Chan (Malaya) Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost RM143k at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through RM13m in negative free cash flow over the last year. That means it's on the risky side of things. 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. Case in point: We've spotted 4 warning signs for Sin Heng Chan (Malaya) Berhad you should be aware of, and 1 of them is concerning.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.