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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Supermax Corporation Berhad (KLSE:SUPERMX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Supermax Corporation Berhad

What Is Supermax Corporation Berhad's Debt?

As you can see below, Supermax Corporation Berhad had RM139.7m of debt at December 2022, down from RM241.8m a year prior. But it also has RM2.61b in cash to offset that, meaning it has RM2.47b net cash.

How Strong Is Supermax Corporation Berhad's Balance Sheet?

The latest balance sheet data shows that Supermax Corporation Berhad had liabilities of RM594.6m due within a year, and liabilities of RM109.4m falling due after that. Offsetting this, it had RM2.61b in cash and RM617.3m in receivables that were due within 12 months. So it can boast RM2.53b more liquid assets than total liabilities.

This luscious liquidity implies that Supermax Corporation Berhad's balance sheet is sturdy like a giant sequoia tree. 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!

Importantly, Supermax Corporation Berhad's EBIT fell a jaw-dropping 100% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Supermax Corporation Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Supermax Corporation Berhad recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that Supermax Corporation Berhad has net cash of RM2.47b and plenty of liquid assets. So we are not troubled with Supermax Corporation Berhad's debt use. 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 example - Supermax Corporation Berhad has 1 warning sign we think 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.