Is Salcon Berhad (KLSE:SALCON) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. 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.

Check out our latest analysis for Salcon Berhad

What Is Salcon Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Salcon Berhad had RM44.8m of debt, an increase on RM20.1m, over one year. But on the other hand it also has RM172.9m in cash, leading to a RM128.1m net cash position.

A Look At Salcon Berhad's Liabilities

We can see from the most recent balance sheet that Salcon Berhad had liabilities of RM142.7m falling due within a year, and liabilities of RM36.3m due beyond that. On the other hand, it had cash of RM172.9m and RM96.0m worth of receivables due within a year. So it actually has RM89.9m more liquid assets than total liabilities.

It's good to see that Salcon Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. 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 you can't view debt in total isolation; since Salcon 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.

In the last year Salcon Berhad had a loss before interest and tax, and actually shrunk its revenue by 24%, to RM155m. That makes us nervous, to say the least.

So How Risky Is Salcon Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Salcon Berhad had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of RM2.0m and booked a RM21m accounting loss. But the saving grace is the RM128.1m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 2 warning signs for Salcon Berhad (1 can't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.