Perusahaan Sadur Timah Malaysia (Perstima) Berhad (KLSE:PERSTIM) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Perusahaan Sadur Timah Malaysia (Perstima) Berhad (KLSE:PERSTIM) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt 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 December 2020, Perusahaan Sadur Timah Malaysia (Perstima) Berhad had RM33.1m of debt, up from RM21.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM132.7m in cash, so it actually has RM99.6m net cash.

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

We can see from the most recent balance sheet that Perusahaan Sadur Timah Malaysia (Perstima) Berhad had liabilities of RM48.0m falling due within a year, and liabilities of RM11.6m due beyond that. Offsetting these obligations, it had cash of RM132.7m as well as receivables valued at RM134.0m due within 12 months. So it actually has RM207.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Perusahaan Sadur Timah Malaysia (Perstima) Berhad's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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.

Also positive, Perusahaan Sadur Timah Malaysia (Perstima) Berhad grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Perusahaan Sadur Timah Malaysia (Perstima) Berhad 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 three years, Perusahaan Sadur Timah Malaysia (Perstima) Berhad reported free cash flow worth 14% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Perusahaan Sadur Timah Malaysia (Perstima) Berhad has RM99.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 29% over the last year. So is Perusahaan Sadur Timah Malaysia (Perstima) Berhad's debt a risk? It doesn't seem so to us. 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 Perusahaan Sadur Timah Malaysia (Perstima) Berhad you should be aware of, and 1 of them is potentially serious.

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.

When trading Perusahaan Sadur Timah Malaysia (Perstima) Berhad or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on 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.