Southern Steel Berhad (KLSE:SSTEEL) Has Debt But No Earnings; Should You Worry?

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.' 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. We note that Southern Steel Berhad (KLSE:SSTEEL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Southern Steel Berhad

How Much Debt Does Southern Steel Berhad Carry?

The image below, which you can click on for greater detail, shows that Southern Steel Berhad had debt of RM767.6m at the end of December 2022, a reduction from RM826.5m over a year. However, it also had RM59.7m in cash, and so its net debt is RM707.9m.

A Look At Southern Steel Berhad's Liabilities

The latest balance sheet data shows that Southern Steel Berhad had liabilities of RM1.06b due within a year, and liabilities of RM167.7m falling due after that. On the other hand, it had cash of RM59.7m and RM150.0m worth of receivables due within a year. So it has liabilities totalling RM1.02b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM292.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Southern Steel Berhad would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Southern Steel Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Southern Steel Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to RM2.3b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Southern Steel Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM79m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized RM29m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Southern Steel Berhad (of which 1 can't be ignored!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.