We Think SKP Resources Bhd (KLSE:SKPRES) Can Stay On Top Of Its Debt

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.' 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. Importantly, SKP Resources Bhd (KLSE:SKPRES) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for SKP Resources Bhd

How Much Debt Does SKP Resources Bhd Carry?

As you can see below, SKP Resources Bhd had RM62.7m of debt at December 2023, down from RM122.7m a year prior. But on the other hand it also has RM191.6m in cash, leading to a RM128.9m net cash position.

How Healthy Is SKP Resources Bhd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SKP Resources Bhd had liabilities of RM397.9m due within 12 months and liabilities of RM27.8m due beyond that. Offsetting this, it had RM191.6m in cash and RM478.2m in receivables that were due within 12 months. So it can boast RM244.1m more liquid assets than total liabilities.

This excess liquidity suggests that SKP Resources Bhd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, SKP Resources Bhd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that SKP Resources Bhd's load is not too heavy, because its EBIT was down 52% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if SKP Resources Bhd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. SKP Resources Bhd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, SKP Resources Bhd recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case SKP Resources Bhd has RM128.9m in net cash and a decent-looking balance sheet. So we are not troubled with SKP Resources Bhd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for SKP Resources Bhd that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.