Is Supermax Corporation Berhad (KLSE:SUPERMX) Using Debt Sensibly?

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 can see that Supermax Corporation Berhad (KLSE:SUPERMX) 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. 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, 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 Supermax Corporation Berhad

What Is Supermax Corporation Berhad's Debt?

The image below, which you can click on for greater detail, shows that Supermax Corporation Berhad had debt of RM81.4m at the end of June 2023, a reduction from RM204.3m over a year. However, its balance sheet shows it holds RM2.15b in cash, so it actually has RM2.06b net cash.

A Look At Supermax Corporation Berhad's Liabilities

We can see from the most recent balance sheet that Supermax Corporation Berhad had liabilities of RM497.6m falling due within a year, and liabilities of RM56.7m due beyond that. On the other hand, it had cash of RM2.15b and RM451.2m worth of receivables due within a year. So it can boast RM2.04b more liquid assets than total liabilities.

This excess liquidity is a great indication that Supermax Corporation Berhad's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Supermax Corporation Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Supermax Corporation Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Supermax Corporation Berhad had a loss before interest and tax, and actually shrunk its revenue by 69%, to RM821m. To be frank that doesn't bode well.

So How Risky Is Supermax Corporation Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Supermax Corporation Berhad had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of RM690m and booked a RM141m accounting loss. With only RM2.06b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Supermax Corporation Berhad's profit, revenue, and operating cashflow have changed over the last few years.

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.