Does Sinmah Capital Berhad (KLSE:SMCAP) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Sinmah Capital Berhad (KLSE:SMCAP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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.

Check out our latest analysis for Sinmah Capital Berhad

What Is Sinmah Capital Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Sinmah Capital Berhad had RM75.5m of debt in September 2021, down from RM95.0m, one year before. However, because it has a cash reserve of RM49.3m, its net debt is less, at about RM26.3m.

How Healthy Is Sinmah Capital Berhad's Balance Sheet?

According to the last reported balance sheet, Sinmah Capital Berhad had liabilities of RM66.8m due within 12 months, and liabilities of RM23.2m due beyond 12 months. Offsetting these obligations, it had cash of RM49.3m as well as receivables valued at RM53.9m due within 12 months. So it actually has RM13.2m more liquid assets than total liabilities.

This excess liquidity is a great indication that Sinmah Capital Berhad's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sinmah Capital Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Sinmah Capital Berhad had a loss before interest and tax, and actually shrunk its revenue by 25%, to RM101m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Sinmah Capital Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at RM4.2m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Sinmah Capital Berhad you should be aware of, and 1 of them is potentially serious.

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.