Senheng New Retail Berhad (KLSE:SENHENG) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Senheng New Retail Berhad (KLSE:SENHENG) makes use of debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Senheng New Retail Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Senheng New Retail Berhad had RM54.9m of debt in December 2024, down from RM71.5m, one year before. But on the other hand it also has RM81.0m in cash, leading to a RM26.2m net cash position.

How Healthy Is Senheng New Retail Berhad's Balance Sheet?

According to the last reported balance sheet, Senheng New Retail Berhad had liabilities of RM202.5m due within 12 months, and liabilities of RM95.6m due beyond 12 months. Offsetting these obligations, it had cash of RM81.0m as well as receivables valued at RM122.4m due within 12 months. So its liabilities total RM94.7m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Senheng New Retail Berhad is worth RM300.0m, 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. Despite its noteworthy liabilities, Senheng New Retail Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Senheng New Retail Berhad

The modesty of its debt load may become crucial for Senheng New Retail Berhad if management cannot prevent a repeat of the 37% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Senheng New Retail 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Senheng New Retail 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. During the last three years, Senheng New Retail Berhad burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

Although Senheng New Retail 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 RM26.2m. Despite its cash we think that Senheng New Retail Berhad seems to struggle to grow its EBIT, so we are wary of the stock. 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, we've discovered 3 warning signs for Senheng New Retail Berhad (1 shouldn't be ignored!) that you should be aware of before investing here.

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.