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. Importantly, Supermax Corporation Berhad (KLSE:SUPERMX) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Supermax Corporation Berhad

How Much Debt Does Supermax Corporation Berhad Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Supermax Corporation Berhad had debt of RM138.7m, up from RM101.3m in one year. But on the other hand it also has RM1.16b in cash, leading to a RM1.02b net cash position.

A Look At Supermax Corporation Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Supermax Corporation Berhad had liabilities of RM323.1m due within 12 months and liabilities of RM56.4m due beyond that. On the other hand, it had cash of RM1.16b and RM343.5m worth of receivables due within a year. So it actually has RM1.13b more liquid assets than total liabilities.

This surplus strongly suggests that Supermax Corporation Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Supermax Corporation 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 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 7.8%, to RM693m. That's not what we would hope to see.

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 in the last year Supermax Corporation Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM478m and booked a RM238m accounting loss. However, it has net cash of RM1.02b, so it has a bit of time before it will need more capital. 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 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. For instance, we've identified 1 warning sign for Supermax Corporation Berhad that you should be aware of.

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. 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.