Is Lion Industries Corporation Berhad (KLSE:LIONIND) A Risky Investment?

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 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. We can see that Lion Industries Corporation Berhad (KLSE:LIONIND) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

How Much Debt Does Lion Industries Corporation Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Lion Industries Corporation Berhad had RM110.9m of debt, an increase on RM95.9m, over one year. However, it does have RM450.7m in cash offsetting this, leading to net cash of RM339.8m.

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

According to the last reported balance sheet, Lion Industries Corporation Berhad had liabilities of RM1.13b due within 12 months, and liabilities of RM469.4m due beyond 12 months. Offsetting this, it had RM450.7m in cash and RM396.6m in receivables that were due within 12 months. So its liabilities total RM749.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM384.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Lion Industries Corporation Berhad would probably need a major re-capitalization if its creditors were to demand repayment. Lion Industries Corporation Berhad boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Lion Industries Corporation Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to RM2.6b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Lion Industries Corporation Berhad?

Although Lion Industries Corporation Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of RM80m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Lion Industries Corporation Berhad you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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