Does Lee Swee Kiat Group Berhad (KLSE:LEESK) Have A Healthy Balance Sheet?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Lee Swee Kiat Group Berhad (KLSE:LEESK) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Lee Swee Kiat Group Berhad

How Much Debt Does Lee Swee Kiat Group Berhad Carry?

As you can see below, Lee Swee Kiat Group Berhad had RM9.85m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds RM21.1m in cash, so it actually has RM11.3m net cash.

A Look At Lee Swee Kiat Group Berhad's Liabilities

According to the last reported balance sheet, Lee Swee Kiat Group Berhad had liabilities of RM29.0m due within 12 months, and liabilities of RM11.3m due beyond 12 months. Offsetting these obligations, it had cash of RM21.1m as well as receivables valued at RM13.8m due within 12 months. So its liabilities total RM5.37m more than the combination of its cash and short-term receivables.

Given Lee Swee Kiat Group Berhad has a market capitalization of RM134.3m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Lee Swee Kiat Group Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Lee Swee Kiat Group Berhad grew its EBIT by 9.2% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Lee Swee Kiat Group Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Lee Swee Kiat Group 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. Over the last three years, Lee Swee Kiat Group Berhad recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Lee Swee Kiat Group Berhad has RM11.3m in net cash. And it impressed us with free cash flow of RM365k, being 87% of its EBIT. So we don't think Lee Swee Kiat Group Berhad's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Lee Swee Kiat Group Berhad that you should be aware of before investing here.

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. 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.