Here's Why Sasbadi Holdings Berhad (KLSE:SASBADI) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Sasbadi Holdings Berhad (KLSE:SASBADI) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sasbadi Holdings Berhad

What Is Sasbadi Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Sasbadi Holdings Berhad had RM20.3m of debt in November 2022, down from RM23.9m, one year before. On the flip side, it has RM11.8m in cash leading to net debt of about RM8.45m.

How Healthy Is Sasbadi Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Sasbadi Holdings Berhad had liabilities of RM37.7m due within a year, and liabilities of RM8.22m falling due after that. Offsetting these obligations, it had cash of RM11.8m as well as receivables valued at RM40.2m due within 12 months. So it actually has RM6.12m more liquid assets than total liabilities.

This short term liquidity is a sign that Sasbadi Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Sasbadi Holdings Berhad has net debt of just 0.80 times EBITDA, indicating that it is certainly not a reckless borrower. And it boasts interest cover of 7.8 times, which is more than adequate. It was also good to see that despite losing money on the EBIT line last year, Sasbadi Holdings Berhad turned things around in the last 12 months, delivering and EBIT of RM7.4m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sasbadi Holdings Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. In the last year, Sasbadi Holdings Berhad's free cash flow amounted to 39% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

The good news is that Sasbadi Holdings Berhad's demonstrated ability handle its debt, based on its EBITDA, delights us like a fluffy puppy does a toddler. And we also thought its level of total liabilities was a positive. All these things considered, it appears that Sasbadi Holdings Berhad can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. 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. We've identified 3 warning signs with Sasbadi Holdings Berhad (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.