These 4 metrics indicate that Scientex Berhad (KLSE: SCIENTX) is using debt reasonably well
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Like many other companies Scientex Berhad (KLSE: SCIENTX) uses debt. But should shareholders be concerned about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. 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. The first step in examining a business’s debt levels is to consider its cash flow and debt together.
Discover our latest analysis for Scientex Berhad
What is Scientex Berhad’s net debt?
As you can see below, at the end of July 2021 Scientex Berhad had a debt of RM 1.12 billion, up from RM 1.04 billion a year ago. Click on the image for more details. However, he has RM243.3million in cash offsetting this, leading to a net debt of around RM876.5million.
How strong is Scientex Berhad’s balance sheet?
The latest balance sheet data shows Scientex Berhad had debts of RM 1.57 billion due within one year, and debts of RM 431.4 million due thereafter. In compensation for these obligations, he had cash of RM 243.3 million as well as receivables valued at RM 696.5 million due within 12 months. Thus, its liabilities are RM 1.06 billion more than the combination of its cash and short-term receivables.
Of course, Scientex Berhad has a market cap of RM7.29b, so those liabilities are probably manageable. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Scientex Berhad has a low net debt to EBITDA ratio of just 1.3. And its EBIT covers its interest costs 52.5 times more. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Fortunately, Scientex Berhad increased its EBIT by 2.9% over the past year, making this debt load even more manageable. When analyzing debt levels, the balance sheet is the obvious place to start. But it is future profits, more than anything, that will determine Scientex Berhad’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. We must therefore clearly examine whether this EBIT leads to the corresponding free cash flow. Fortunately for all shareholders, Scientex Berhad has actually generated more free cash flow than EBIT over the past three years. There is nothing better than cash flow to stay in the good graces of your lenders.
Our point of view
Scientex Berhad’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. And this is only the beginning of good news as its conversion from EBIT to free cash flow is also very encouraging. When zoomed out, Scientex Berhad appears to be using the debt quite sensibly; and that gets the nod from us. After all, reasonable leverage can increase returns on equity. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. To this end, you need to know the 1 warning sign we spotted with Scientex Berhad.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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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 any stock 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 documents. Simply Wall St has no position in any of the stocks mentioned.