Is Solution Group Berhad (KLSE:SOLUTN) Weighed On By Its Debt Load?

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 Solution Group Berhad (KLSE:SOLUTN) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Solution Group Berhad

How Much Debt Does Solution Group Berhad Carry?

The chart below, which you can click on for greater detail, shows that Solution Group Berhad had RM6.35m in debt in December 2020; about the same as the year before. However, it does have RM50.0m in cash offsetting this, leading to net cash of RM43.6m.

How Strong Is Solution Group Berhad's Balance Sheet?

We can see from the most recent balance sheet that Solution Group Berhad had liabilities of RM4.50m falling due within a year, and liabilities of RM6.21m due beyond that. Offsetting this, it had RM50.0m in cash and RM17.1m in receivables that were due within 12 months. So it actually has RM56.4m more liquid assets than total liabilities.

This surplus suggests that Solution Group Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Solution Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Solution Group 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.

In the last year Solution Group Berhad had a loss before interest and tax, and actually shrunk its revenue by 4.1%, to RM18m. We would much prefer see growth.

So How Risky Is Solution Group Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Solution Group Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM3.7m and booked a RM943k accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of RM43.6m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Solution Group Berhad (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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. 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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