These 4 Measures Indicate That Luster Industries Bhd (KLSE:LUSTER) Is Using Debt Reasonably Well

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.' 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. We can see that Luster Industries Bhd (KLSE:LUSTER) does use debt in its business. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Luster Industries Bhd's Net Debt?

As you can see below, Luster Industries Bhd had RM63.8m of debt, at March 2025, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds RM88.4m in cash, so it actually has RM24.6m net cash.

A Look At Luster Industries Bhd's Liabilities

According to the last reported balance sheet, Luster Industries Bhd had liabilities of RM144.6m due within 12 months, and liabilities of RM127.0m due beyond 12 months. Offsetting these obligations, it had cash of RM88.4m as well as receivables valued at RM72.2m due within 12 months. So its liabilities total RM111.0m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of RM134.5m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Luster Industries Bhd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Luster Industries Bhd

In addition to that, we're happy to report that Luster Industries Bhd has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Luster Industries Bhd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last two years, Luster Industries Bhd's free cash flow amounted to 26% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Luster Industries Bhd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM24.6m. And we liked the look of last year's 38% year-on-year EBIT growth. So we are not troubled with Luster Industries Bhd's debt use. 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 2 warning signs in our investment analysis , and 1 of those is significant...

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.