Is Cahya Mata Sarawak Berhad (KLSE:CMSB) A Risky Investment?

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 note that Cahya Mata Sarawak Berhad (KLSE:CMSB) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Cahya Mata Sarawak Berhad

How Much Debt Does Cahya Mata Sarawak Berhad Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Cahya Mata Sarawak Berhad had debt of RM851.3m, up from RM754.9m in one year. However, it also had RM654.4m in cash, and so its net debt is RM196.8m.

How Strong Is Cahya Mata Sarawak Berhad's Balance Sheet?

We can see from the most recent balance sheet that Cahya Mata Sarawak Berhad had liabilities of RM556.8m falling due within a year, and liabilities of RM884.0m due beyond that. Offsetting these obligations, it had cash of RM654.4m as well as receivables valued at RM346.2m due within 12 months. So its liabilities total RM440.2m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Cahya Mata Sarawak Berhad has a market capitalization of RM1.72b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Cahya Mata Sarawak 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.

Over 12 months, Cahya Mata Sarawak Berhad made a loss at the EBIT level, and saw its revenue drop to RM763m, which is a fall of 32%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Cahya Mata Sarawak Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost RM44m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM194m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Cahya Mata Sarawak Berhad you should be aware of.

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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