We Think See Hup Consolidated Berhad (KLSE:SEEHUP) Has A Fair Chunk Of Debt

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. Importantly, See Hup Consolidated Berhad (KLSE:SEEHUP) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for See Hup Consolidated Berhad

What Is See Hup Consolidated Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that See Hup Consolidated Berhad had RM31.0m of debt in September 2020, down from RM33.3m, one year before. However, because it has a cash reserve of RM14.8m, its net debt is less, at about RM16.2m.

How Strong Is See Hup Consolidated Berhad's Balance Sheet?

We can see from the most recent balance sheet that See Hup Consolidated Berhad had liabilities of RM29.4m falling due within a year, and liabilities of RM23.5m due beyond that. On the other hand, it had cash of RM14.8m and RM22.8m worth of receivables due within a year. So its liabilities total RM15.3m more than the combination of its cash and short-term receivables.

See Hup Consolidated Berhad has a market capitalization of RM76.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since See Hup Consolidated 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.

In the last year See Hup Consolidated Berhad had a loss before interest and tax, and actually shrunk its revenue by 16%, to RM80m. We would much prefer see growth.

Caveat Emptor

While See Hup Consolidated Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at RM4.3m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of RM7.9m into a profit. In the meantime, we consider the stock very risky. 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. To that end, you should learn about the 3 warning signs we've spotted with See Hup Consolidated Berhad (including 2 which make us uncomfortable) .

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. 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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