These 4 Measures Indicate That Suria Capital Holdings Berhad (KLSE:SURIA) Is Using Debt Reasonably Well

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Suria Capital Holdings Berhad (KLSE:SURIA) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

See our latest analysis for Suria Capital Holdings Berhad

What Is Suria Capital Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Suria Capital Holdings Berhad had debt of RM18.1m at the end of September 2020, a reduction from RM55.0m over a year. But it also has RM122.6m in cash to offset that, meaning it has RM104.6m net cash.

How Strong Is Suria Capital Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Suria Capital Holdings Berhad had liabilities of RM71.9m due within 12 months, and liabilities of RM159.0m due beyond 12 months. On the other hand, it had cash of RM122.6m and RM152.7m worth of receivables due within a year. So it can boast RM44.5m more liquid assets than total liabilities.

This surplus suggests that Suria Capital Holdings Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Suria Capital Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Suria Capital Holdings Berhad's saving grace is its low debt levels, because its EBIT has tanked 37% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Suria Capital Holdings 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Suria Capital Holdings 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. In the last three years, Suria Capital Holdings Berhad's free cash flow amounted to 44% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Suria Capital Holdings Berhad has RM104.6m in net cash and a decent-looking balance sheet. So we don't have any problem with Suria Capital Holdings Berhad's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Suria Capital Holdings Berhad (of which 1 is potentially serious!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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