Health Check: How Prudently Does Sunzen Biotech Berhad (KLSE:SUNZEN) Use 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.' 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. As with many other companies Sunzen Biotech Berhad (KLSE:SUNZEN) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sunzen Biotech Berhad

What Is Sunzen Biotech Berhad's Net Debt?

As you can see below, Sunzen Biotech Berhad had RM14.8m of debt at December 2020, down from RM15.6m a year prior. But it also has RM38.9m in cash to offset that, meaning it has RM24.2m net cash.

How Strong Is Sunzen Biotech Berhad's Balance Sheet?

We can see from the most recent balance sheet that Sunzen Biotech Berhad had liabilities of RM21.3m falling due within a year, and liabilities of RM8.69m due beyond that. Offsetting these obligations, it had cash of RM38.9m as well as receivables valued at RM11.0m due within 12 months. So it can boast RM20.0m more liquid assets than total liabilities.

This excess liquidity suggests that Sunzen Biotech Berhad is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Sunzen Biotech Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sunzen Biotech 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.

Over 12 months, Sunzen Biotech Berhad made a loss at the EBIT level, and saw its revenue drop to RM82m, which is a fall of 66%. To be frank that doesn't bode well.

So How Risky Is Sunzen Biotech Berhad?

Although Sunzen Biotech Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM5.6m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. We've identified 2 warning signs with Sunzen Biotech Berhad (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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