Is Luster Industries Bhd (KLSE:LUSTER) Using Too Much Debt?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Luster Industries Bhd (KLSE:LUSTER) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Luster Industries Bhd
How Much Debt Does Luster Industries Bhd Carry?
As you can see below, at the end of March 2023, Luster Industries Bhd had RM67.3m of debt, up from RM32.1m a year ago. Click the image for more detail. But it also has RM83.8m in cash to offset that, meaning it has RM16.5m net cash.
How Healthy Is Luster Industries Bhd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Luster Industries Bhd had liabilities of RM149.3m due within 12 months and liabilities of RM121.0m due beyond that. Offsetting this, it had RM83.8m in cash and RM68.3m in receivables that were due within 12 months. So it has liabilities totalling RM118.1m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Luster Industries Bhd is worth RM226.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Luster Industries Bhd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Luster Industries Bhd 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.
Over 12 months, Luster Industries Bhd reported revenue of RM154m, which is a gain of 3.0%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Luster Industries Bhd?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Luster Industries Bhd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through RM7.4m of cash and made a loss of RM19m. Given it only has net cash of RM16.5m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Be aware that Luster Industries Bhd is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...
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.
About KLSE:LUSTER
Luster Industries Bhd
An investment holding company, manufactures and sells precision plastic parts and components.
Adequate balance sheet with acceptable track record.