Is LKL International Berhad (KLSE:LKL) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, LKL International Berhad (KLSE:LKL) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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 LKL International Berhad

How Much Debt Does LKL International Berhad Carry?

The image below, which you can click on for greater detail, shows that at December 2022 LKL International Berhad had debt of RM8.50m, up from RM5.55m in one year. But it also has RM26.7m in cash to offset that, meaning it has RM18.2m net cash.

How Healthy Is LKL International Berhad's Balance Sheet?

The latest balance sheet data shows that LKL International Berhad had liabilities of RM13.1m due within a year, and liabilities of RM7.95m falling due after that. Offsetting this, it had RM26.7m in cash and RM21.5m in receivables that were due within 12 months. So it actually has RM27.1m 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! The balance sheet is clearly the area to focus on when you are analysing debt. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 39%, to RM82m. Shareholders probably have their fingers crossed that it can grow its way to profits.

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 the fact is that over the last twelve months LKL International Berhad lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through RM27m of cash and made a loss of RM16m. With only RM18.2m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, LKL International Berhad may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with LKL International Berhad (at least 3 which are significant) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.