Is Southern Steel Berhad (KLSE:SSTEEL) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Southern Steel Berhad (KLSE:SSTEEL) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Southern Steel Berhad

What Is Southern Steel Berhad's Net Debt?

As you can see below, Southern Steel Berhad had RM644.2m of debt at December 2024, down from RM865.1m a year prior. However, it also had RM122.3m in cash, and so its net debt is RM521.9m.

How Healthy Is Southern Steel Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Southern Steel Berhad had liabilities of RM864.7m due within 12 months and liabilities of RM55.0m due beyond that. Offsetting these obligations, it had cash of RM122.3m as well as receivables valued at RM134.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM663.2m.

When you consider that this deficiency exceeds the company's RM660.5m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Southern Steel Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Southern Steel Berhad had a loss before interest and tax, and actually shrunk its revenue by 11%, to RM2.1b. That's not what we would hope to see.

Caveat Emptor

Not only did Southern Steel Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at RM14m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of RM48m didn't encourage us either; we'd like to see a profit. And until that time we think this is a 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. We've identified 1 warning sign with Southern Steel Berhad , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.