Does Sebata Holdings (JSE:SEB) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Sebata Holdings Limited (JSE:SEB) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sebata Holdings

How Much Debt Does Sebata Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Sebata Holdings had R41.1m of debt in March 2021, down from R83.4m, one year before. But on the other hand it also has R132.4m in cash, leading to a R91.2m net cash position.

How Healthy Is Sebata Holdings' Balance Sheet?

According to the last reported balance sheet, Sebata Holdings had liabilities of R118.0m due within 12 months, and liabilities of R285.7m due beyond 12 months. Offsetting these obligations, it had cash of R132.4m as well as receivables valued at R14.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R256.5m.

Given this deficit is actually higher than the company's market capitalization of R254.4m, we think shareholders really should watch Sebata Holdings's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Sebata Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sebata Holdings will need earnings to service that debt. 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.

In the last year Sebata Holdings had a loss before interest and tax, and actually shrunk its revenue by 79%, to R34m. That makes us nervous, to say the least.

So How Risky Is Sebata Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Sebata Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of R19m and booked a R53m accounting loss. Given it only has net cash of R91.2m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. To that end, you should learn about the 3 warning signs we've spotted with Sebata Holdings (including 1 which shouldn't be ignored) .

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. 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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