Is Perusahaan Sadur Timah Malaysia (Perstima) Berhad (KLSE:PERSTIM) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Perusahaan Sadur Timah Malaysia (Perstima) Berhad (KLSE:PERSTIM) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Perusahaan Sadur Timah Malaysia (Perstima) Berhad

What Is Perusahaan Sadur Timah Malaysia (Perstima) Berhad's Debt?

As you can see below, at the end of March 2021, Perusahaan Sadur Timah Malaysia (Perstima) Berhad had RM60.1m of debt, up from RM15.1m a year ago. Click the image for more detail. But it also has RM74.8m in cash to offset that, meaning it has RM14.7m net cash.

How Healthy Is Perusahaan Sadur Timah Malaysia (Perstima) Berhad's Balance Sheet?

According to the last reported balance sheet, Perusahaan Sadur Timah Malaysia (Perstima) Berhad had liabilities of RM106.3m due within 12 months, and liabilities of RM26.1m due beyond 12 months. On the other hand, it had cash of RM74.8m and RM142.8m worth of receivables due within a year. So it can boast RM85.1m more liquid assets than total liabilities.

It's good to see that Perusahaan Sadur Timah Malaysia (Perstima) Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Perusahaan Sadur Timah Malaysia (Perstima) Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Perusahaan Sadur Timah Malaysia (Perstima) Berhad grew its EBIT by 71% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Perusahaan Sadur Timah Malaysia (Perstima) Berhad's earnings that will influence how the balance sheet holds up in the future. 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 Perusahaan Sadur Timah Malaysia (Perstima) Berhad 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. During the last three years, Perusahaan Sadur Timah Malaysia (Perstima) Berhad burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Perusahaan Sadur Timah Malaysia (Perstima) Berhad has net cash of RM14.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 71% over the last year. So is Perusahaan Sadur Timah Malaysia (Perstima) Berhad's debt a risk? It doesn't seem so to us. 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. For example Perusahaan Sadur Timah Malaysia (Perstima) Berhad has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.