We Think LTKM Berhad (KLSE:LTKM) Can Manage Its Debt With Ease

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.' 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. Importantly, LTKM Berhad (KLSE:LTKM) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for LTKM Berhad

How Much Debt Does LTKM Berhad Carry?

The chart below, which you can click on for greater detail, shows that LTKM Berhad had RM68.2m in debt in December 2023; about the same as the year before. However, its balance sheet shows it holds RM94.4m in cash, so it actually has RM26.2m net cash.

A Look At LTKM Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that LTKM Berhad had liabilities of RM79.4m due within 12 months and liabilities of RM27.7m due beyond that. On the other hand, it had cash of RM94.4m and RM11.3m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to LTKM Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the RM229.0m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, LTKM Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that LTKM Berhad grew its EBIT by 233% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is LTKM Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. LTKM 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 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

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 RM26.2m. And it impressed us with free cash flow of RM49m, being 164% of its EBIT. 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 1 warning sign for LTKM Berhad that you should be aware of before investing here.

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. 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.