Health Check: How Prudently Does Rimbunan Sawit Berhad (KLSE:RSAWIT) Use Debt?

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. As with many other companies Rimbunan Sawit Berhad (KLSE:RSAWIT) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Rimbunan Sawit Berhad

What Is Rimbunan Sawit Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Rimbunan Sawit Berhad had RM331.1m in debt in December 2023; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Rimbunan Sawit Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rimbunan Sawit Berhad had liabilities of RM301.8m due within 12 months and liabilities of RM188.7m due beyond that. On the other hand, it had cash of RM2.66m and RM22.3m worth of receivables due within a year. So its liabilities total RM465.6m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of RM551.3m, so it does suggest shareholders should keep an eye on Rimbunan Sawit Berhad's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Rimbunan Sawit 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 Rimbunan Sawit Berhad had a loss before interest and tax, and actually shrunk its revenue by 25%, to RM508m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Rimbunan Sawit Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost RM34m at the EBIT level. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of RM12m and the profit of RM24m. So one might argue that there's still a chance it can get things on the right track. 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 Rimbunan Sawit Berhad (of which 1 makes us a bit uncomfortable!) 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.