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 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. Importantly, Seal Incorporated Berhad (KLSE:SEAL) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Seal Berhad
What Is Seal Berhad's Net Debt?
As you can see below, Seal Berhad had RM83.6m of debt at December 2020, down from RM90.5m a year prior. However, it does have RM3.73m in cash offsetting this, leading to net debt of about RM79.9m.
A Look At Seal Berhad's Liabilities
According to the last reported balance sheet, Seal Berhad had liabilities of RM86.6m due within 12 months, and liabilities of RM61.8m due beyond 12 months. Offsetting these obligations, it had cash of RM3.73m as well as receivables valued at RM166.0m due within 12 months. So it actually has RM21.4m more liquid assets than total liabilities.
This surplus suggests that Seal Berhad is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Seal 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.
It seems likely shareholders hope that Seal Berhad can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.
Caveat Emptor
While Seal Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost RM2.6m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. And on top of that, it booked free cash flow of RM4.3m and profit of RM7.5m over the last year. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Seal Berhad , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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About KLSE:SEAL
Seal Berhad
Engages in the property investment, development, and management business in Malaysia.
Adequate balance sheet slight.
