Does Salcon Berhad (KLSE:SALCON) Have A Healthy Balance Sheet?

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.' 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 can see that Salcon Berhad (KLSE:SALCON) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Salcon Berhad

What Is Salcon Berhad's Debt?

As you can see below, at the end of March 2021, Salcon Berhad had RM32.5m of debt, up from RM28.5m a year ago. Click the image for more detail. But it also has RM134.5m in cash to offset that, meaning it has RM102.0m net cash.

How Healthy Is Salcon Berhad's Balance Sheet?

The latest balance sheet data shows that Salcon Berhad had liabilities of RM114.3m due within a year, and liabilities of RM24.8m falling due after that. Offsetting this, it had RM134.5m in cash and RM192.4m in receivables that were due within 12 months. So it can boast RM187.8m more liquid assets than total liabilities.

This surplus liquidity suggests that Salcon Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Salcon Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Salcon Berhad improved its EBIT from a last year's loss to a positive RM1.0m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Salcon Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Salcon Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Salcon Berhad actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Salcon Berhad has RM102.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM5.3m, being 510% of its EBIT. So is Salcon Berhad's debt a risk? It doesn't seem so to us. 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. Be aware that Salcon Berhad is showing 2 warning signs in our investment analysis , 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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