Is Sasbadi Holdings Berhad (KLSE:SASBADI) Using Too Much Debt?

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.' 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. Importantly, Sasbadi Holdings Berhad (KLSE:SASBADI) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sasbadi Holdings Berhad

What Is Sasbadi Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Sasbadi Holdings Berhad had debt of RM14.1m at the end of May 2022, a reduction from RM21.5m over a year. However, it does have RM10.9m in cash offsetting this, leading to net debt of about RM3.26m.

How Healthy Is Sasbadi Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Sasbadi Holdings Berhad had liabilities of RM32.6m due within 12 months, and liabilities of RM8.97m due beyond 12 months. Offsetting these obligations, it had cash of RM10.9m as well as receivables valued at RM38.2m due within 12 months. So it actually has RM7.51m more liquid assets than total liabilities.

This excess liquidity suggests that Sasbadi Holdings Berhad is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Sasbadi Holdings Berhad saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Sasbadi Holdings Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM11m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But a profit would do more to inspire us to research the business more closely. So it seems too risky for our taste. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Sasbadi Holdings Berhad you should know about.

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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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.