Is Leader Steel Holdings Berhad (KLSE:LSTEEL) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Leader Steel Holdings Berhad (KLSE:LSTEEL) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Leader Steel Holdings Berhad

How Much Debt Does Leader Steel Holdings Berhad Carry?

As you can see below, Leader Steel Holdings Berhad had RM61.8m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has RM26.7m in cash leading to net debt of about RM35.2m.

How Strong Is Leader Steel Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Leader Steel Holdings Berhad had liabilities of RM50.3m falling due within a year, and liabilities of RM53.8m due beyond that. Offsetting this, it had RM26.7m in cash and RM41.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM36.4m.

Leader Steel Holdings Berhad has a market capitalization of RM68.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Leader Steel Holdings Berhad will need earnings to service that debt. 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, Leader Steel Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM183m, which is a fall of 3.7%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Leader Steel Holdings Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM10m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled RM30m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For example, we've discovered 2 warning signs for Leader Steel Holdings Berhad that you should be aware of before investing here.

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.

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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.