We Think Luster Industries Bhd (KLSE:LUSTER) Is Taking Some Risk With Its 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.' 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. As with many other companies Luster Industries Bhd (KLSE:LUSTER) makes use of debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Luster Industries Bhd Carry?

The image below, which you can click on for greater detail, shows that Luster Industries Bhd had debt of RM64.8m at the end of June 2025, a reduction from RM70.3m over a year. But on the other hand it also has RM89.8m in cash, leading to a RM25.0m net cash position.

A Look At Luster Industries Bhd's Liabilities

According to the last reported balance sheet, Luster Industries Bhd had liabilities of RM163.5m due within 12 months, and liabilities of RM132.6m due beyond 12 months. On the other hand, it had cash of RM89.8m and RM77.9m worth of receivables due within a year. So its liabilities total RM128.5m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of RM149.3m, so it does suggest shareholders should keep an eye on Luster Industries Bhd's use of debt. 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.

See our latest analysis for Luster Industries Bhd

Luster Industries Bhd's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 company can only pay off debt with cold hard cash, not accounting profits. Luster Industries Bhd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Luster Industries Bhd reported free cash flow worth 11% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While Luster Industries Bhd does have more liabilities than liquid assets, it also has net cash of RM25.0m. So while Luster Industries Bhd does not have a great balance sheet, it's certainly not too bad. 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. Case in point: We've spotted 3 warning signs for Luster Industries Bhd you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.