Perusahaan Sadur Timah Malaysia (Perstima) Berhad (KLSE:PERSTIM) Is Carrying A Fair Bit Of 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 Perusahaan Sadur Timah Malaysia (Perstima) Berhad (KLSE:PERSTIM) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

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

How Much Debt Does Perusahaan Sadur Timah Malaysia (Perstima) Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Perusahaan Sadur Timah Malaysia (Perstima) Berhad had RM346.3m of debt, an increase on RM256.5m, over one year. However, it also had RM144.8m in cash, and so its net debt is RM201.5m.

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 RM359.6m due within 12 months, and liabilities of RM46.5m due beyond 12 months. On the other hand, it had cash of RM144.8m and RM169.8m worth of receivables due within a year. So it has liabilities totalling RM91.5m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Perusahaan Sadur Timah Malaysia (Perstima) Berhad has a market capitalization of RM306.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Perusahaan Sadur Timah Malaysia (Perstima) Berhad 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.

In the last year Perusahaan Sadur Timah Malaysia (Perstima) Berhad had a loss before interest and tax, and actually shrunk its revenue by 7.9%, to RM937m. We would much prefer see growth.

Caveat Emptor

Importantly, Perusahaan Sadur Timah Malaysia (Perstima) Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM22m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM39m of cash over the last year. So in short it's a really risky stock. 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 instance, we've identified 3 warning signs for Perusahaan Sadur Timah Malaysia (Perstima) Berhad (2 are potentially serious) you should be aware of.

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.

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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.