Sin Heng Chan (Malaya) Berhad (KLSE:SHCHAN) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Sin Heng Chan (Malaya) Berhad (KLSE:SHCHAN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

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. 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. 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.

What Is Sin Heng Chan (Malaya) Berhad's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Sin Heng Chan (Malaya) Berhad had debt of RM174.2m, up from RM166.4m in one year. However, it also had RM37.8m in cash, and so its net debt is RM136.4m.

A Look At Sin Heng Chan (Malaya) Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Sin Heng Chan (Malaya) Berhad had liabilities of RM45.3m due within 12 months and liabilities of RM153.6m due beyond that. On the other hand, it had cash of RM37.8m and RM15.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM146.0m.

The deficiency here weighs heavily on the RM85.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Sin Heng Chan (Malaya) 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 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.

See our latest analysis for Sin Heng Chan (Malaya) Berhad

In the last year Sin Heng Chan (Malaya) Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to RM53m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Sin Heng Chan (Malaya) Berhad still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at RM2.5m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of RM17m over the last twelve months. That means it's on the risky side of things. 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 3 warning signs for Sin Heng Chan (Malaya) Berhad (2 are concerning) you should be aware of.

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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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.