Is Sapura Resources Berhad (KLSE:SAPRES) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Sapura Resources Berhad (KLSE:SAPRES) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Sapura Resources Berhad

How Much Debt Does Sapura Resources Berhad Carry?

The image below, which you can click on for greater detail, shows that at July 2021 Sapura Resources Berhad had debt of RM7.67m, up from none in one year. However, it does have RM18.1m in cash offsetting this, leading to net cash of RM10.4m.

A Look At Sapura Resources Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Sapura Resources Berhad had liabilities of RM43.8m due within 12 months and liabilities of RM33.0m due beyond that. Offsetting these obligations, it had cash of RM18.1m as well as receivables valued at RM7.64m due within 12 months. So it has liabilities totalling RM51.1m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of RM63.5m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Sapura Resources Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sapura Resources Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Sapura Resources Berhad made a loss at the EBIT level, and saw its revenue drop to RM29m, which is a fall of 33%. To be frank that doesn't bode well.

So How Risky Is Sapura Resources Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Sapura Resources Berhad had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through RM29m of cash and made a loss of RM32m. While this does make the company a bit risky, it's important to remember it has net cash of RM10.4m. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Sapura Resources Berhad is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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