LTKM Berhad (KLSE:LTKM) Seems To Use Debt Quite Sensibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that LTKM Berhad (KLSE:LTKM) does use debt in its business. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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. 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, 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.

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 RM61.8m at the end of December 2024, a reduction from RM68.2m over a year. But it also has RM71.7m in cash to offset that, meaning it has RM9.92m net cash.

How Strong Is LTKM Berhad's Balance Sheet?

According to the last reported balance sheet, LTKM Berhad had liabilities of RM77.4m due within 12 months, and liabilities of RM26.0m due beyond 12 months. Offsetting this, it had RM71.7m in cash and RM16.4m in receivables that were due within 12 months. So it has liabilities totalling RM15.3m more than its cash and near-term receivables, combined.

Since publicly traded LTKM Berhad shares are worth a total of RM183.2m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, LTKM Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for LTKM Berhad

The modesty of its debt load may become crucial for LTKM Berhad if management cannot prevent a repeat of the 29% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since LTKM 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 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. Happily for any shareholders, LTKM Berhad actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about LTKM Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM9.92m. And it impressed us with free cash flow of RM41m, being 174% of its EBIT. So we are not troubled with LTKM Berhad's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for LTKM Berhad you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.