Is LKL International Berhad (KLSE:LKL) 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. As with many other companies LKL International Berhad (KLSE:LKL) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for LKL International Berhad

What Is LKL International Berhad's Net Debt?

As you can see below, at the end of June 2024, LKL International Berhad had RM21.9m of debt, up from RM8.56m a year ago. Click the image for more detail. However, it does have RM25.2m in cash offsetting this, leading to net cash of RM3.35m.

How Strong Is LKL International Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that LKL International Berhad had liabilities of RM22.0m due within 12 months and liabilities of RM8.22m due beyond that. On the other hand, it had cash of RM25.2m and RM24.8m worth of receivables due within a year. So it can boast RM19.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that LKL International Berhad's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, LKL International Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since LKL International 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.

In the last year LKL International Berhad had a loss before interest and tax, and actually shrunk its revenue by 31%, to RM44m. That makes us nervous, to say the least.

So How Risky Is LKL International Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year LKL International Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM15m and booked a RM8.5m accounting loss. But at least it has RM3.35m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that LKL International Berhad is showing 3 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.