Is Salcon Berhad (KLSE:SALCON) 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.' 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 more important question is: how much risk is that debt creating?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See 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 Salcon Berhad had debt of RM21.7m at the end of September 2022, a reduction from RM30.0m over a year. But it also has RM154.3m in cash to offset that, meaning it has RM132.6m net cash.

A Look At Salcon Berhad's Liabilities

We can see from the most recent balance sheet that Salcon Berhad had liabilities of RM116.3m falling due within a year, and liabilities of RM20.9m due beyond that. Offsetting this, it had RM154.3m in cash and RM137.6m in receivables that were due within 12 months. So it actually has RM154.8m 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. Simply put, the fact that Salcon Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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 RM50m, which is a fall of 89%. 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 RM30m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The next few years will be important as the business matures. 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. We've identified 1 warning sign with Salcon Berhad , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.