These 4 Measures Indicate That Latitude Tree Holdings Berhad (KLSE:LATITUD) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Latitude Tree Holdings Berhad (KLSE:LATITUD) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Latitude Tree Holdings Berhad

What Is Latitude Tree Holdings Berhad's Debt?

As you can see below, Latitude Tree Holdings Berhad had RM119.3m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds RM225.5m in cash, so it actually has RM106.2m net cash.

How Healthy Is Latitude Tree Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Latitude Tree Holdings Berhad had liabilities of RM235.5m due within 12 months, and liabilities of RM32.9m due beyond 12 months. Offsetting this, it had RM225.5m in cash and RM74.2m in receivables that were due within 12 months. So it can boast RM31.2m more liquid assets than total liabilities.

This surplus suggests that Latitude Tree Holdings Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Latitude Tree Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Latitude Tree Holdings Berhad grew its EBIT by 351% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Latitude Tree Holdings Berhad will need earnings to service that debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Latitude Tree Holdings 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, Latitude Tree Holdings Berhad created free cash flow amounting to 15% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Latitude Tree Holdings Berhad has net cash of RM106.2m, as well as more liquid assets than liabilities. And we liked the look of last year's 351% year-on-year EBIT growth. So is Latitude Tree Holdings Berhad's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Latitude Tree Holdings Berhad you should be aware of, and 1 of them shouldn't be ignored.

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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