Is Sarawak Plantation Berhad (KLSE:SWKPLNT) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Sarawak Plantation Berhad (KLSE:SWKPLNT) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sarawak Plantation Berhad

What Is Sarawak Plantation Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Sarawak Plantation Berhad had RM97.0m of debt in December 2020, down from RM109.9m, one year before. But on the other hand it also has RM99.9m in cash, leading to a RM2.93m net cash position.

A Look At Sarawak Plantation Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Sarawak Plantation Berhad had liabilities of RM130.2m due within 12 months and liabilities of RM172.7m due beyond that. Offsetting these obligations, it had cash of RM99.9m as well as receivables valued at RM8.67m due within 12 months. So it has liabilities totalling RM194.3m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Sarawak Plantation Berhad is worth RM725.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Sarawak Plantation Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Sarawak Plantation Berhad grew its EBIT by 179% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sarawak Plantation Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sarawak Plantation Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Sarawak Plantation Berhad produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Sarawak Plantation Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM2.93m. And we liked the look of last year's 179% year-on-year EBIT growth. So is Sarawak Plantation Berhad's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Sarawak Plantation Berhad is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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