Does Lion Posim Berhad (KLSE:LIONPSIM) Have A Healthy Balance Sheet?

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, Lion Posim Berhad (KLSE:LIONPSIM) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Lion Posim Berhad

What Is Lion Posim Berhad's Net Debt?

As you can see below, at the end of December 2020, Lion Posim Berhad had RM18.1m of debt, up from RM788.0k a year ago. Click the image for more detail. But on the other hand it also has RM260.8m in cash, leading to a RM242.7m net cash position.

How Strong Is Lion Posim Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lion Posim Berhad had liabilities of RM139.3m due within 12 months and liabilities of RM283.0k due beyond that. On the other hand, it had cash of RM260.8m and RM322.1m worth of receivables due within a year. So it can boast RM443.3m more liquid assets than total liabilities.

This surplus liquidity suggests that Lion Posim Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Lion Posim Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Lion Posim Berhad grew its EBIT by 148% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lion Posim Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Lion Posim 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. During the last three years, Lion Posim Berhad burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Lion Posim Berhad has RM242.7m in net cash and a strong balance sheet. And it impressed us with its EBIT growth of 148% over the last year. So we don't think Lion Posim Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Lion Posim Berhad (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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