Is Selangor Dredging Berhad (KLSE:SDRED) A Risky Investment?

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. We note that Selangor Dredging Berhad (KLSE:SDRED) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Selangor Dredging Berhad

What Is Selangor Dredging Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Selangor Dredging Berhad had debt of RM409.4m at the end of September 2021, a reduction from RM432.6m over a year. However, because it has a cash reserve of RM39.3m, its net debt is less, at about RM370.1m.

A Look At Selangor Dredging Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Selangor Dredging Berhad had liabilities of RM403.4m due within 12 months and liabilities of RM167.4m due beyond that. Offsetting this, it had RM39.3m in cash and RM189.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM341.6m.

Given this deficit is actually higher than the company's market capitalization of RM255.7m, we think shareholders really should watch Selangor Dredging Berhad's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Selangor Dredging 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 Selangor Dredging Berhad had a loss before interest and tax, and actually shrunk its revenue by 9.4%, to RM159m. That's not what we would hope to see.

Caveat Emptor

Importantly, Selangor Dredging Berhad had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at RM6.8m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. But on the bright side the company actually produced a statutory profit of RM2.7m and free cash flow of RM63m. So one might argue that there's still a chance it can get things on the right track. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Selangor Dredging Berhad (2 are concerning) 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. 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.