We Think SNS Network Technology Berhad (KLSE:SNS) 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. As with many other companies SNS Network Technology Berhad (KLSE:SNS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for SNS Network Technology Berhad

What Is SNS Network Technology Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that SNS Network Technology Berhad had debt of RM31.1m at the end of January 2024, a reduction from RM33.7m over a year. However, its balance sheet shows it holds RM116.6m in cash, so it actually has RM85.5m 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 RM267.0m due within 12 months, and liabilities of RM26.2m due beyond 12 months. On the other hand, it had cash of RM116.6m and RM224.9m worth of receivables due within a year. So it actually has RM48.4m more liquid assets than total liabilities.

This short term liquidity is a sign that SNS Network Technology Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SNS Network Technology Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for SNS Network Technology Berhad if management cannot prevent a repeat of the 24% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is SNS Network Technology 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 we empathize with investors who find debt concerning, you should keep in mind that SNS Network Technology Berhad has net cash of RM85.5m, as well as more liquid assets than liabilities. So we don't have any problem with SNS Network Technology Berhad's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with SNS Network Technology Berhad .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.