Does Sapura Resources Berhad (KLSE:SAPRES) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Sapura Resources Berhad (KLSE:SAPRES) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Sapura Resources Berhad

What Is Sapura Resources Berhad's Debt?

As you can see below, at the end of January 2022, Sapura Resources Berhad had RM12.2m of debt, up from RM2.43m a year ago. Click the image for more detail. But on the other hand it also has RM18.6m in cash, leading to a RM6.34m net cash position.

How Strong Is Sapura Resources Berhad's Balance Sheet?

The latest balance sheet data shows that Sapura Resources Berhad had liabilities of RM82.0m due within a year, and liabilities of RM479.6m falling due after that. Offsetting these obligations, it had cash of RM18.6m as well as receivables valued at RM8.50m due within 12 months. So its liabilities total RM534.5m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM46.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Sapura Resources Berhad would probably need a major re-capitalization if its creditors were to demand repayment. Sapura Resources Berhad boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. 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 Sapura Resources 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.

In the last year Sapura Resources Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to RM45m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Sapura Resources Berhad?

While Sapura Resources Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM5.3m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Sapura Resources Berhad (1 is a bit unpleasant!) that you should be aware of before investing here.

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.