Here's Why LTKM Berhad (KLSE:LTKM) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that LTKM Berhad (KLSE:LTKM) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for LTKM Berhad

What Is LTKM Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 LTKM Berhad had RM79.7m of debt, an increase on RM74.8m, over one year. However, it also had RM40.9m in cash, and so its net debt is RM38.8m.

How Healthy Is LTKM Berhad's Balance Sheet?

According to the last reported balance sheet, LTKM Berhad had liabilities of RM55.4m due within 12 months, and liabilities of RM42.7m due beyond 12 months. Offsetting these obligations, it had cash of RM40.9m as well as receivables valued at RM15.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM41.3m.

LTKM Berhad has a market capitalization of RM148.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since LTKM 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.

In the last year LTKM Berhad had a loss before interest and tax, and actually shrunk its revenue by 27%, to RM137m. That makes us nervous, to say the least.

Caveat Emptor

While LTKM Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping RM27m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM13m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. Be aware that LTKM Berhad is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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