Lion Posim Berhad (KLSE:LIONPSIM) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Lion Posim Berhad

How Much Debt Does Lion Posim Berhad Carry?

As you can see below, at the end of March 2024, Lion Posim Berhad had RM36.8m of debt, up from RM33.0m a year ago. Click the image for more detail. But it also has RM76.8m in cash to offset that, meaning it has RM40.0m net cash.

How Healthy Is Lion Posim Berhad's Balance Sheet?

We can see from the most recent balance sheet that Lion Posim Berhad had liabilities of RM165.6m falling due within a year, and liabilities of RM6.46m due beyond that. Offsetting these obligations, it had cash of RM76.8m as well as receivables valued at RM518.6m due within 12 months. So it actually has RM423.3m more liquid assets than total liabilities.

This excess liquidity is a great indication that Lion Posim Berhad's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Lion Posim Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

We saw Lion Posim Berhad grow its EBIT by 10.0% in the last twelve months. Whilst that hardly knocks our socks off it is a positive when it comes to debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Lion Posim Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Lion Posim Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Lion Posim Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Lion Posim Berhad has RM40.0m in net cash and a strong balance sheet. And it also grew its EBIT by 10.0% over the last year. So we don't have any problem with Lion Posim Berhad's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Lion Posim Berhad that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com