Does L&P Global Berhad (KLSE:L&PBHD) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 L&P Global Berhad (KLSE:L&PBHD) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 L&P Global Berhad

What Is L&P Global Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that L&P Global Berhad had RM29.1m of debt in December 2023, down from RM42.2m, one year before. But on the other hand it also has RM40.2m in cash, leading to a RM11.1m net cash position.

A Look At L&P Global Berhad's Liabilities

We can see from the most recent balance sheet that L&P Global Berhad had liabilities of RM11.6m falling due within a year, and liabilities of RM31.4m due beyond that. Offsetting these obligations, it had cash of RM40.2m as well as receivables valued at RM37.1m due within 12 months. So it can boast RM34.2m more liquid assets than total liabilities.

This surplus suggests that L&P Global Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, L&P Global Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that L&P Global Berhad grew its EBIT at 14% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is L&P Global 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. L&P Global Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, L&P Global Berhad recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that L&P Global Berhad has net cash of RM11.1m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 14% in the last twelve months. So we don't think L&P Global Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for L&P Global Berhad you should be aware of.

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. 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.