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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Sapura Resources Berhad (KLSE:SAPRES) does use debt in its business. But the real question is whether this debt is making the company risky.
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Sapura Resources Berhad's Net Debt?
The image below, which you can click on for greater detail, shows that at July 2022 Sapura Resources Berhad had debt of RM12.8m, up from RM7.67m in one year. But on the other hand it also has RM36.5m in cash, leading to a RM23.6m net cash position.
A Look At Sapura Resources Berhad's Liabilities
We can see from the most recent balance sheet that Sapura Resources Berhad had liabilities of RM114.2m falling due within a year, and liabilities of RM474.5m due beyond that. Offsetting these obligations, it had cash of RM36.5m as well as receivables valued at RM10.6m due within 12 months. So it has liabilities totalling RM541.6m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the RM35.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Sapura Resources Berhad would likely require a major re-capitalisation if it had to pay its creditors today. Given that Sapura Resources Berhad has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Sapura Resources Berhad had a loss before interest and tax, and actually shrunk its revenue by 89%, to RM3.2m. That makes us nervous, to say the least.
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 RM8.5m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. 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 instance, we've identified 4 warning signs for Sapura Resources Berhad that you should be aware of.
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.
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Sapura Resources Berhad
Sapura Resources Berhad, an investment holding company, engages in property investment activities in Malaysia and internationally.
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Mediocre balance sheet and slightly overvalued.