Salutica Berhad (KLSE:SALUTE) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Salutica Berhad (KLSE:SALUTE) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Salutica Berhad

What Is Salutica Berhad's Net Debt?

As you can see below, at the end of September 2021, Salutica Berhad had RM11.0m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds RM37.7m in cash, so it actually has RM26.7m net cash.

A Look At Salutica Berhad's Liabilities

According to the last reported balance sheet, Salutica Berhad had liabilities of RM46.3m due within 12 months, and liabilities of RM4.10m due beyond 12 months. On the other hand, it had cash of RM37.7m and RM21.2m worth of receivables due within a year. So it can boast RM8.55m more liquid assets than total liabilities.

This short term liquidity is a sign that Salutica Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Salutica Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Salutica 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, Salutica Berhad reported revenue of RM204m, which is a gain of 9.0%, 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.

So How Risky Is Salutica Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Salutica Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM31m and booked a RM9.8m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of RM26.7m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Case in point: We've spotted 4 warning signs for Salutica Berhad you should be aware of, and 1 of them 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.

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.

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