Sanichi Technology Berhad (KLSE: SANICHI) has debt but no income; Should you be worried?
Howard Marks said 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 that every practical investor that I know is worried”. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Mostly, Sanichi Berhad Technology (KLSE: SANICHI) is in debt. But the more important question is: what risk does this debt create?
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
See our latest analysis for Sanichi Technology Berhad
How much debt does Sanichi Technology Berhad have?
You can click on the graph below for historical figures, but it shows that as of December 2021, Sanichi Technology Berhad had debt of RM40.5 million, an increase from RM38.1 million, on a year. But he also has RM154.2m in cash to make up for that, meaning he has a net cash of RM113.7m.
How healthy is Sanichi Technology Berhad’s balance sheet?
According to the latest published balance sheet, Sanichi Technology Berhad had liabilities of RM34.8 million due within 12 months and liabilities of RM33.8 million due beyond 12 months. On the other hand, it had cash of RM154.2 million and RM53.6 million of receivables due within one year. So he actually has RM139.2 million Continued liquid assets than total liabilities.
This surplus strongly suggests that Sanichi Technology Berhad has a rock-solid balance sheet (and debt is no problem). With that in mind, one could argue that its track record means the company is capable of dealing with some adversity. In short, Sanichi Technology Berhad has clean cash, so it’s fair to say that it doesn’t have a lot of debt! The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Sanichi Technology Berhad that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Over the past year, Sanichi Technology Berhad posted a loss before interest and tax and actually reduced its revenue by 25% to RM18 million. It makes us nervous, to say the least.
So how risky is Sanichi Berhad technology?
Although Sanichi Technology Berhad recorded a loss of earnings before interest and tax (EBIT) in the last twelve months, it generated a positive free cash flow of RM10 million. So, although it is loss-making, it does not seem to have too much short-term balance sheet risk, given net cash. There is no doubt that the next few years will be crucial for the maturation of the company. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Example: we have identified 5 warning signs for Sanichi Technology Berhad you should be aware, and 2 of them are concerning.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.