Is Sarawak Oil Palms Berhad (KLSE:SOP) A Risky Investment?
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Sarawak Oil Palms Berhad (KLSE:SOP) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Sarawak Oil Palms Berhad's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2025 Sarawak Oil Palms Berhad had debt of RM524.3m, up from RM445.8m in one year. But it also has RM1.79b in cash to offset that, meaning it has RM1.26b net cash.
How Strong Is Sarawak Oil Palms Berhad's Balance Sheet?
According to the last reported balance sheet, Sarawak Oil Palms Berhad had liabilities of RM617.3m due within 12 months, and liabilities of RM627.6m due beyond 12 months. Offsetting these obligations, it had cash of RM1.79b as well as receivables valued at RM365.6m due within 12 months. So it actually has RM908.6m more liquid assets than total liabilities.
It's good to see that Sarawak Oil Palms Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Sarawak Oil Palms Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.
Check out our latest analysis for Sarawak Oil Palms Berhad
Also good is that Sarawak Oil Palms Berhad grew its EBIT at 18% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sarawak Oil Palms Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sarawak Oil Palms Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Sarawak Oil Palms Berhad recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Sarawak Oil Palms Berhad has net cash of RM1.26b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM341m, being 75% of its EBIT. So we don't think Sarawak Oil Palms Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Sarawak Oil Palms Berhad (at least 1 which is concerning) , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.