Is Sedania Innovator Berhad (KLSE:SEDANIA) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Sedania Innovator Berhad (KLSE:SEDANIA) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sedania Innovator Berhad

What Is Sedania Innovator Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Sedania Innovator Berhad had RM8.42m of debt, an increase on RM5.61m, over one year. But it also has RM9.57m in cash to offset that, meaning it has RM1.15m net cash.

How Healthy Is Sedania Innovator Berhad's Balance Sheet?

The latest balance sheet data shows that Sedania Innovator Berhad had liabilities of RM4.83m due within a year, and liabilities of RM8.31m falling due after that. Offsetting this, it had RM9.57m in cash and RM19.9m in receivables that were due within 12 months. So it actually has RM16.3m more liquid assets than total liabilities.

It's good to see that Sedania Innovator Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Sedania Innovator Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that Sedania Innovator Berhad's EBIT was down 28% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sedania Innovator Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sedania Innovator 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. Considering the last three years, Sedania Innovator Berhad actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sedania Innovator Berhad has RM1.15m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Sedania Innovator Berhad's balance sheet. 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 example - Sedania Innovator Berhad has 1 warning sign we think you should be aware of.

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.