Landmarks Berhad (KLSE:LANDMRK) Has Debt But No Earnings; Should You Worry?

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. We can see that Landmarks Berhad (KLSE:LANDMRK) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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.

Check out our latest analysis for Landmarks Berhad

What Is Landmarks Berhad's Net Debt?

As you can see below, at the end of September 2020, Landmarks Berhad had RM127.6m of debt, up from RM120.4m a year ago. Click the image for more detail. On the flip side, it has RM11.0m in cash leading to net debt of about RM116.6m.

A Look At Landmarks Berhad's Liabilities

According to the last reported balance sheet, Landmarks Berhad had liabilities of RM40.7m due within 12 months, and liabilities of RM457.2m due beyond 12 months. Offsetting this, it had RM11.0m in cash and RM11.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM475.2m.

This deficit casts a shadow over the RM203.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Landmarks Berhad would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Landmarks 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.

Over 12 months, Landmarks Berhad made a loss at the EBIT level, and saw its revenue drop to RM64m, which is a fall of 43%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Landmarks Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM51m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through RM31m in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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. Be aware that Landmarks Berhad is showing 4 warning signs in our investment analysis , and 2 of those are a bit concerning...

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. 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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