Is Sunzen Biotech Berhad (KLSE:SUNZEN) Weighed On By Its Debt Load?

Warren Buffett famously said, '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. As with many other companies Sunzen Biotech Berhad (KLSE:SUNZEN) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sunzen Biotech Berhad

How Much Debt Does Sunzen Biotech Berhad Carry?

As you can see below, Sunzen Biotech Berhad had RM15.0m of debt at September 2020, down from RM15.7m a year prior. But on the other hand it also has RM35.8m in cash, leading to a RM20.8m net cash position.

A Look At Sunzen Biotech Berhad's Liabilities

We can see from the most recent balance sheet that Sunzen Biotech Berhad had liabilities of RM12.3m falling due within a year, and liabilities of RM18.0m due beyond that. Offsetting this, it had RM35.8m in cash and RM10.5m in receivables that were due within 12 months. So it can boast RM15.9m more liquid assets than total liabilities.

This excess liquidity suggests that Sunzen Biotech Berhad is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Sunzen Biotech Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Sunzen Biotech 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.

Over 12 months, Sunzen Biotech Berhad made a loss at the EBIT level, and saw its revenue drop to RM99m, which is a fall of 63%. That makes us nervous, to say the least.

So How Risky Is Sunzen Biotech Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Sunzen Biotech Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM8.2m and booked a RM17m accounting loss. But at least it has RM20.8m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Sunzen Biotech Berhad (1 doesn't sit too well with us) you should be aware of.

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. 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.
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