Is BSL Corporation Berhad (KLSE:BSLCORP) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, BSL Corporation Berhad (KLSE:BSLCORP) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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 BSL Corporation Berhad

What Is BSL Corporation Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 BSL Corporation Berhad had debt of RM17.5m, up from RM14.7m in one year. However, it does have RM126.4m in cash offsetting this, leading to net cash of RM109.0m.

How Strong Is BSL Corporation Berhad's Balance Sheet?

According to the last reported balance sheet, BSL Corporation Berhad had liabilities of RM50.1m due within 12 months, and liabilities of RM10.4m due beyond 12 months. Offsetting these obligations, it had cash of RM126.4m as well as receivables valued at RM23.3m due within 12 months. So it can boast RM89.3m more liquid assets than total liabilities.

This excess liquidity is a great indication that BSL Corporation 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, BSL Corporation 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 it is BSL Corporation Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year BSL Corporation Berhad had a loss before interest and tax, and actually shrunk its revenue by 31%, to RM111m. To be frank that doesn't bode well.

So How Risky Is BSL Corporation Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months BSL Corporation Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM4.0m and booked a RM32m accounting loss. But the saving grace is the RM109.0m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 3 warning signs with BSL Corporation Berhad (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

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.