Is LTKM Berhad (KLSE:LTKM) Using Too Much 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. As with many other companies LTKM Berhad (KLSE:LTKM) makes use of debt. 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for LTKM Berhad

What Is LTKM Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that LTKM Berhad had debt of RM68.9m at the end of June 2023, a reduction from RM76.1m over a year. However, its balance sheet shows it holds RM95.4m in cash, so it actually has RM26.5m net cash.

How Strong Is LTKM Berhad's Balance Sheet?

We can see from the most recent balance sheet that LTKM Berhad had liabilities of RM89.3m falling due within a year, and liabilities of RM31.8m due beyond that. On the other hand, it had cash of RM95.4m and RM12.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM13.0m.

Since publicly traded LTKM Berhad shares are worth a total of RM217.5m, it seems unlikely that this level of liabilities would be a major 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, LTKM Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, LTKM Berhad's EBIT launched higher than Elon Musk, gaining a whopping 351% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But it is LTKM Berhad's earnings that will influence how the balance sheet holds up in the future. 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, a company can only pay off debt with cold hard cash, not accounting profits. While LTKM 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. Over the last two years, LTKM Berhad actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that LTKM Berhad has RM26.5m in net cash. The cherry on top was that in converted 302% of that EBIT to free cash flow, bringing in RM49m. So we don't think LTKM Berhad's use of debt is risky. 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. For example, we've discovered 2 warning signs for LTKM Berhad (1 shouldn't be ignored!) that you should be aware of before investing here.

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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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.