Is Rimbunan Sawit Berhad (KLSE:RSAWIT) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 note that Rimbunan Sawit Berhad (KLSE:RSAWIT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Rimbunan Sawit Berhad

What Is Rimbunan Sawit Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Rimbunan Sawit Berhad had debt of RM400.8m at the end of December 2020, a reduction from RM497.5m over a year. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Rimbunan Sawit Berhad's Balance Sheet?

We can see from the most recent balance sheet that Rimbunan Sawit Berhad had liabilities of RM312.3m falling due within a year, and liabilities of RM235.9m due beyond that. Offsetting this, it had RM1.12m in cash and RM29.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM518.1m.

This is a mountain of leverage relative to its market capitalization of RM722.9m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Rimbunan Sawit 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.

Over 12 months, Rimbunan Sawit Berhad reported revenue of RM386m, which is a gain of 36%, 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

Despite the top line growth, Rimbunan Sawit Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM35m 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. However, it doesn't help that it burned through RM41m of cash over the last year. So in short it's a really risky stock. 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. Be aware that Rimbunan Sawit Berhad is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

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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