Does Binasat Communications Berhad (KLSE:BINACOM) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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 can see that Binasat Communications Berhad (KLSE:BINACOM) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Binasat Communications Berhad

How Much Debt Does Binasat Communications Berhad Carry?

The chart below, which you can click on for greater detail, shows that Binasat Communications Berhad had RM6.35m in debt in December 2020; about the same as the year before. But it also has RM36.1m in cash to offset that, meaning it has RM29.7m net cash.

How Strong Is Binasat Communications Berhad's Balance Sheet?

According to the last reported balance sheet, Binasat Communications Berhad had liabilities of RM7.92m due within 12 months, and liabilities of RM19.2m due beyond 12 months. On the other hand, it had cash of RM36.1m and RM26.6m worth of receivables due within a year. So it can boast RM35.6m more liquid assets than total liabilities.

This surplus liquidity suggests that Binasat Communications Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Binasat Communications Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Binasat Communications Berhad grew its EBIT by 17% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Binasat Communications Berhad will need earnings to service that debt. 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. While Binasat Communications Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Binasat Communications Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Binasat Communications Berhad has RM29.7m in net cash and a decent-looking balance sheet. And we liked the look of last year's 17% year-on-year EBIT growth. So we are not troubled with Binasat Communications Berhad'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 4 warning signs for Binasat Communications Berhad (2 are potentially serious) 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. 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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