We Think Leader Steel Holdings Berhad (KLSE:LSTEEL) Has A Fair Chunk Of Debt

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. We note that Leader Steel Holdings Berhad (KLSE:LSTEEL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Leader Steel Holdings Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that Leader Steel Holdings Berhad had RM67.7m in debt in December 2024; about the same as the year before. On the flip side, it has RM41.6m in cash leading to net debt of about RM26.2m.

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

Zooming in on the latest balance sheet data, we can see that Leader Steel Holdings Berhad had liabilities of RM65.1m due within 12 months and liabilities of RM52.7m due beyond that. On the other hand, it had cash of RM41.6m and RM31.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM44.7m.

This is a mountain of leverage relative to its market capitalization of RM61.9m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Leader Steel Holdings Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for Leader Steel Holdings Berhad

Over 12 months, Leader Steel Holdings Berhad reported revenue of RM218m, which is a gain of 14%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Leader Steel Holdings Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable RM13m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of RM6.5m and the profit of RM2.2m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Leader Steel Holdings Berhad that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.