Is Sebata Holdings (JSE:SEB) Using Too Much Debt?

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. As with many other companies Sebata Holdings Limited (JSE:SEB) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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

What Is Sebata Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Sebata Holdings had debt of R60.3m, up from R14.9m in one year. However, its balance sheet shows it holds R248.6m in cash, so it actually has R188.3m net cash.

A Look At Sebata Holdings' Liabilities

The latest balance sheet data shows that Sebata Holdings had liabilities of R57.0m due within a year, and liabilities of R64.2m falling due after that. On the other hand, it had cash of R248.6m and R7.15m worth of receivables due within a year. So it can boast R134.5m more liquid assets than total liabilities.

This surplus liquidity suggests that Sebata Holdings' 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, Sebata Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sebata Holdings 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 Sebata Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to R33m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Sebata Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Sebata Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of R9.5m and booked a R114m accounting loss. But the saving grace is the R188.3m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Sebata Holdings (of which 3 are significant!) you should know about.

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.