These 4 Measures Indicate That Astino Berhad (KLSE:ASTINO) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Astino Berhad (KLSE:ASTINO) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Astino Berhad

What Is Astino Berhad's Debt?

The image below, which you can click on for greater detail, shows that Astino Berhad had debt of RM37.4m at the end of October 2020, a reduction from RM69.7m over a year. However, its balance sheet shows it holds RM40.5m in cash, so it actually has RM3.10m net cash.

How Strong Is Astino Berhad's Balance Sheet?

We can see from the most recent balance sheet that Astino Berhad had liabilities of RM58.5m falling due within a year, and liabilities of RM23.0m due beyond that. Offsetting these obligations, it had cash of RM40.5m as well as receivables valued at RM96.6m due within 12 months. So it actually has RM55.5m more liquid assets than total liabilities.

It's good to see that Astino Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Astino Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Astino Berhad grew its EBIT by 9.5% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is Astino Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Astino 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. In the last three years, Astino Berhad's free cash flow amounted to 50% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Astino Berhad has RM3.10m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 9.5% over the last year. So we don't think Astino 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Astino Berhad (of which 1 is significant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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