Does Supermax Corporation Berhad (KLSE:SUPERMX) have a healthy balance sheet?
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”. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Supermax Corporation Berhad (KLSE:SUPERMX) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Supermax Corporation Berhad
What is the debt of Supermax Corporation Berhad?
As you can see below, Supermax Corporation Berhad had a debt of RM207.6 million in March 2022, compared to RM311.1 million the previous year. But he also has RM2.97 billion in cash to offset that, meaning he has a net cash of RM2.76 billion.
How healthy is Supermax Corporation Berhad’s balance sheet?
We can see from the most recent balance sheet that Supermax Corporation Berhad had liabilities of RM799.2m due in one year, and liabilities of RM100.5m due beyond. As compensation for these obligations, it had cash of RM2.97 billion as well as receivables valued at RM905.8 million due within 12 months. So it actually has RM2.98b After liquid assets than total liabilities.
This excess liquidity suggests that Supermax Corporation Berhad’s balance sheet could take a hit as well as Homer Simpson’s head can take a hit. From this perspective, lenders should feel as secure as the beloved of a black belt karate master. Simply put, the fact that Supermax Corporation Berhad has more cash than debt is arguably a good indication that it can safely manage its debt.
In fact, Supermax Corporation Berhad’s saving grace is its low level of debt, as its EBIT has fallen by 47% in the last twelve months. When it comes to paying off debt, lower income is no more helpful than sugary sodas for your health. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Supermax Corporation Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Supermax Corporation 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 three years, Supermax Corporation Berhad has recorded free cash flow of 63% of its EBIT, which is about normal given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.
While it is always a good idea to investigate a company’s debt, in this case Supermax Corporation Berhad has RM2.76 billion in net cash and a strong balance sheet. So is Supermax Corporation Berhad’s debt a risk? This does not seem to us to be the case. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 4 warning signs for Supermax Corporation Berhad (2 of which don’t really suit us!) that you should know.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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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.