Is Rimbunan Sawit Berhad (KLSE:RSAWIT) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Rimbunan Sawit Berhad (KLSE:RSAWIT) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Rimbunan Sawit Berhad

How Much Debt Does Rimbunan Sawit Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Rimbunan Sawit Berhad had RM415.1m of debt in September 2020, down from RM523.5m, one 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?

According to the last reported balance sheet, Rimbunan Sawit Berhad had liabilities of RM366.3m due within 12 months, and liabilities of RM236.6m due beyond 12 months. On the other hand, it had cash of RM4.75m and RM29.4m worth of receivables due within a year. So it has liabilities totalling RM568.8m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of RM659.5m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Rimbunan Sawit Berhad reported revenue of RM360m, which is a gain of 24%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Rimbunan Sawit Berhad's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost RM9.2m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of RM31m into a profit. In the meantime, we consider the stock very 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. To that end, you should learn about the 2 warning signs we've spotted with Rimbunan Sawit Berhad (including 1 which doesn't sit too well with us) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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