Is Sentoria Group Berhad (KLSE:SNTORIA) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Sentoria Group Berhad (KLSE:SNTORIA) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sentoria Group Berhad

What Is Sentoria Group Berhad's Net Debt?

As you can see below, Sentoria Group Berhad had RM435.6m of debt at December 2021, down from RM460.6m a year prior. However, because it has a cash reserve of RM9.08m, its net debt is less, at about RM426.5m.

A Look At Sentoria Group Berhad's Liabilities

The latest balance sheet data shows that Sentoria Group Berhad had liabilities of RM605.4m due within a year, and liabilities of RM107.0m falling due after that. Offsetting these obligations, it had cash of RM9.08m as well as receivables valued at RM127.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM575.5m.

This deficit casts a shadow over the RM97.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Sentoria Group Berhad would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sentoria Group 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, Sentoria Group Berhad reported revenue of RM71m, which is a gain of 19%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Sentoria Group Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM30m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost RM94m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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. To that end, you should learn about the 2 warning signs we've spotted with Sentoria Group Berhad (including 1 which can't be ignored) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.