SNS Network Technology Berhad (KLSE:SNS) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that SNS Network Technology Berhad (KLSE:SNS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SNS Network Technology Berhad

What Is SNS Network Technology Berhad's Debt?

The image below, which you can click on for greater detail, shows that at October 2023 SNS Network Technology Berhad had debt of RM39.9m, up from RM33.7m in one year. But it also has RM80.9m in cash to offset that, meaning it has RM41.1m net cash.

How Strong Is SNS Network Technology Berhad's Balance Sheet?

According to the last reported balance sheet, SNS Network Technology Berhad had liabilities of RM183.3m due within 12 months, and liabilities of RM29.0m due beyond 12 months. On the other hand, it had cash of RM80.9m and RM131.5m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that SNS Network Technology Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the RM403.2m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, SNS Network Technology Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that SNS Network Technology Berhad has seen its EBIT plunge 12% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SNS Network Technology Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. SNS Network Technology Berhad 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, SNS Network Technology Berhad recorded free cash flow of 49% 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 SNS Network Technology Berhad has RM41.1m in net cash and a decent-looking balance sheet. So we are not troubled with SNS Network Technology Berhad's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for SNS Network Technology Berhad that 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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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.