Health Check: How Prudently Does Salcon Berhad (KLSE:SALCON) Use Debt?

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.' 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 Salcon Berhad (KLSE:SALCON) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Salcon Berhad

What Is Salcon Berhad's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Salcon Berhad had debt of RM26.5m, up from RM22.0m in one year. But it also has RM153.8m in cash to offset that, meaning it has RM127.3m net cash.

How Strong Is Salcon Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Salcon Berhad had liabilities of RM114.4m due within 12 months and liabilities of RM19.7m due beyond that. On the other hand, it had cash of RM153.8m and RM107.2m worth of receivables due within a year. So it can boast RM127.0m 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! When analysing debt levels, the balance sheet is the obvious place to start. But it is Salcon Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Salcon Berhad made a loss at the EBIT level, and saw its revenue drop to RM193m, which is a fall of 34%. To be frank that doesn't bode well.

So How Risky Is Salcon Berhad?

Although Salcon Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM20m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Salcon Berhad that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.