Sasbadi Holdings Berhad (KLSE:SASBADI) Has A Rock Solid Balance Sheet

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Sasbadi Holdings Berhad (KLSE:SASBADI) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. 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 Sasbadi Holdings Berhad

How Much Debt Does Sasbadi Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Sasbadi Holdings Berhad had RM7.32m of debt in May 2023, down from RM14.1m, one year before. However, its balance sheet shows it holds RM11.5m in cash, so it actually has RM4.21m net cash.

How Healthy Is Sasbadi Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Sasbadi Holdings Berhad had liabilities of RM28.0m due within 12 months, and liabilities of RM11.3m due beyond 12 months. Offsetting these obligations, it had cash of RM11.5m as well as receivables valued at RM42.2m due within 12 months. So it can boast RM14.4m more liquid assets than total liabilities.

It's good to see that Sasbadi Holdings Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Sasbadi Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Sasbadi Holdings Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM15m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Sasbadi Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sasbadi Holdings Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Sasbadi Holdings Berhad produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sasbadi Holdings Berhad has RM4.21m in net cash and a decent-looking balance sheet. So we don't think Sasbadi Holdings Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Sasbadi Holdings Berhad you should be aware of, and 1 of them makes us a bit uncomfortable.

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.