Is UEM Sunrise Berhad (KLSE:UEMS) Using Too Much Debt?

Warren Buffett famously said, '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 can see that UEM Sunrise Berhad (KLSE:UEMS) 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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that UEMS is potentially undervalued!

What Is UEM Sunrise Berhad's Debt?

The chart below, which you can click on for greater detail, shows that UEM Sunrise Berhad had RM4.35b in debt in June 2022; about the same as the year before. However, it also had RM639.4m in cash, and so its net debt is RM3.71b.

How Healthy Is UEM Sunrise Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that UEM Sunrise Berhad had liabilities of RM3.05b due within 12 months and liabilities of RM3.14b due beyond that. Offsetting these obligations, it had cash of RM639.4m as well as receivables valued at RM1.16b due within 12 months. So it has liabilities totalling RM4.39b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM1.16b 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. At the end of the day, UEM Sunrise Berhad would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine UEM Sunrise Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year UEM Sunrise Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to RM1.5b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months UEM Sunrise Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost RM22m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost RM162m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that UEM Sunrise Berhad is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.