Would Sinmah Capital Berhad (KLSE:SMCAP) Be Better Off With Less Debt?

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.' 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?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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?

As you can see below, Sinmah Capital Berhad had RM65.1m of debt at March 2021, down from RM78.9m a year prior. On the flip side, it has RM44.9m in cash leading to net debt of about RM20.2m.

How Healthy Is Sinmah Capital Berhad's Balance Sheet?

According to the last reported balance sheet, Sinmah Capital Berhad had liabilities of RM54.3m due within 12 months, and liabilities of RM27.5m due beyond 12 months. Offsetting these obligations, it had cash of RM44.9m as well as receivables valued at RM50.6m due within 12 months. So it can boast RM13.8m more liquid assets than total liabilities.

This surplus suggests that Sinmah Capital Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. The balance sheet is clearly the area to focus on when you are analysing debt. 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 42%, to RM105m. That makes us nervous, to say the least.

Caveat Emptor

While Sinmah Capital Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at RM4.1m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. 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. 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. Be aware that Sinmah Capital Berhad is showing 4 warning signs in our investment analysis , and 2 of those can't be ignored...

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. 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.
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