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. ” So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Like many other companies Sealink International Berhad (KLSE: SEALINK) uses debt. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first consider both liquidity and debt levels.
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What is the debt of Sealink International Berhad?
You can click on the graph below for historical figures, but it shows that Sealink International Berhad had RM91.8million in debt in June 2021, up from RM99.5million a year earlier. However, he also had RM7.00million in cash, so his net debt is RM84.8million.
A look at the responsibilities of Sealink International Berhad
According to the latest published balance sheet, Sealink International Berhad had liabilities of RM 108.6 million due within 12 months and liabilities of RM 40.6 million due beyond 12 months. On the other hand, he had a cash position of RM 7.00 million and RM 37.3 million of receivables due within one year. Thus, its liabilities are RM 104.9 million more than the combination of its cash and short-term receivables.
Since this deficit is actually more than the company’s market cap of RM75 million, we think shareholders should really watch the debt levels of Sealink International Berhad, like a parent watching their child ride a bike. for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely that shareholders would suffer a significant dilution. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Sealink International Berhad will need income to repay this debt. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.
Over 12 months, Sealink International Berhad recorded a loss in EBIT and saw its turnover fall to RM32 million, a decrease of 62%. To be frank, that doesn’t bode well.
Not only has Sealink International Berhad’s revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). Indeed, he lost a very considerable RM48m in EBIT. Considering that aside from the liabilities mentioned above, we are nervous about the business. We would like to see big improvements in the short term before we get too interested in the title. Notably because he burned RM14million in negative free cash flow in the past year. So suffice to say that we consider the title to be risky. 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. We have identified 3 warning signs with Sealink International Berhad (at least 1 which is potentially serious), and understanding them should be part of your investment process.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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