Is Lion Industries Corporation Berhad (KLSE:LIONIND) Using Debt Sensibly?

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.' 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 note that Lion Industries Corporation Berhad (KLSE:LIONIND) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Lion Industries Corporation Berhad

How Much Debt Does Lion Industries Corporation Berhad Carry?

As you can see below, Lion Industries Corporation Berhad had RM126.9m of debt at December 2020, down from RM134.3m a year prior. However, it does have RM369.0m in cash offsetting this, leading to net cash of RM242.1m.

A Look At Lion Industries Corporation Berhad's Liabilities

The latest balance sheet data shows that Lion Industries Corporation Berhad had liabilities of RM1.03b due within a year, and liabilities of RM476.3m falling due after that. Offsetting this, it had RM369.0m in cash and RM424.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM716.7m.

Given this deficit is actually higher than the company's market capitalization of RM514.0m, we think shareholders really should watch Lion Industries Corporation Berhad's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Lion Industries Corporation Berhad had a loss before interest and tax, and actually shrunk its revenue by 12%, to RM2.4b. That's not what we would hope to see.

So How Risky Is Lion Industries Corporation Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Lion Industries Corporation Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM79m and booked a RM98m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of RM242.1m. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Lion Industries Corporation Berhad , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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