Health Check: How Prudently Does Lion Industries Corporation Berhad (KLSE:LIONIND) Use Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Lion Industries Corporation Berhad (KLSE:LIONIND) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Lion Industries Corporation Berhad

What Is Lion Industries Corporation Berhad's Net Debt?

As you can see below, Lion Industries Corporation Berhad had RM120.0m of debt at September 2020, down from RM135.5m a year prior. But on the other hand it also has RM237.3m in cash, leading to a RM117.3m net cash position.

How Healthy Is Lion Industries Corporation Berhad's Balance Sheet?

According to the last reported balance sheet, Lion Industries Corporation Berhad had liabilities of RM909.6m due within 12 months, and liabilities of RM539.5m due beyond 12 months. Offsetting these obligations, it had cash of RM237.3m as well as receivables valued at RM414.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM796.8m.

The deficiency here weighs heavily on the RM272.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Lion Industries Corporation Berhad would likely require a major re-capitalisation if it had to pay its creditors today. Given that Lion Industries Corporation Berhad has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. There's no doubt that we learn most about debt from the balance sheet. But it is Lion Industries Corporation 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, Lion Industries Corporation Berhad made a loss at the EBIT level, and saw its revenue drop to RM2.4b, which is a fall of 18%. We would much prefer see growth.

So How Risky Is Lion Industries Corporation Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Lion Industries Corporation Berhad had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through RM55m of cash and made a loss of RM315m. But the saving grace is the RM117.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Take risks, for example - Lion Industries Corporation Berhad has 2 warning signs we think 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. 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.
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