Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Salcon Berhad (KLSE: SALCON) uses debt in his business. But the most important question is: what risk does this debt create?
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
Discover our latest analysis for Salcon Berhad
What is the debt of Salcon Berhad?
As you can see below, at the end of March 2021, Salcon Berhad had a debt of RM32.5million, up from RM28.5million a year ago. Click on the image for more details. But he also has RM134.5million in cash to make up for this, which means he has a net cash position of RM102.0million.
How healthy is Salcon Berhad’s track record?
The latest balance sheet data shows Salcon Berhad had debts of RM 114.3 million due within one year, and RM 24.8 million debts due thereafter. In return, he had RM 134.5 million in cash and RM 192.4 million in receivables due within 12 months. Thus, he can boast of having over 187.8 million RM of liquid assets that total Liabilities.
This excess liquidity suggests that Salcon Berhad’s balance sheet could take a hit just as Homer’s Simpson head can take a hit. Given this fact, we believe its track record is as strong as an ox. In short, Salcon Berhad has a net cash flow, so it’s fair to say he doesn’t have a lot of debt!
We also note that Salcon Berhad improved its EBIT from a loss last year to a positive result of RM 1.0 million. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Salcon Berhad can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. Salcon Berhad may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past year, Salcon Berhad has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
While it is always a good idea to investigate a company’s debt, in this case Salcon Berhad has RM102.0million in net cash and a decent balance sheet. And he impressed us with free cash flow of RM 5.3million, or 510% of his EBIT. So is Salcon Berhad’s debt a risk? It does not seem to us. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. Note that Salcon Berhad shows 2 warning signs in our investment analysis , you must know…
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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