Sunsuria Berhad (KLSE:SUNSURIA) Has A Somewhat Strained Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Sunsuria Berhad (KLSE:SUNSURIA) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sunsuria Berhad

How Much Debt Does Sunsuria Berhad Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Sunsuria Berhad had debt of RM242.8m, up from RM180.2m in one year. However, it does have RM340.9m in cash offsetting this, leading to net cash of RM98.2m.

How Strong Is Sunsuria Berhad's Balance Sheet?

We can see from the most recent balance sheet that Sunsuria Berhad had liabilities of RM232.1m falling due within a year, and liabilities of RM427.3m due beyond that. Offsetting these obligations, it had cash of RM340.9m as well as receivables valued at RM222.9m due within 12 months. So its liabilities total RM95.6m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Sunsuria Berhad is worth RM452.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Sunsuria Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Sunsuria Berhad's load is not too heavy, because its EBIT was down 74% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sunsuria 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sunsuria Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Sunsuria Berhad created free cash flow amounting to 17% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

Although Sunsuria Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM98.2m. So although we see some areas for improvement, we're not too worried about Sunsuria Berhad's balance sheet. 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 example - Sunsuria Berhad has 2 warning signs we think 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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