Does Lagenda Properties Berhad (KLSE:LAGENDA) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Lagenda Properties Berhad (KLSE:LAGENDA) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Lagenda Properties Berhad

What Is Lagenda Properties Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Lagenda Properties Berhad had RM302.4m of debt in December 2023, down from RM379.3m, one year before. However, its balance sheet shows it holds RM325.1m in cash, so it actually has RM22.7m net cash.

A Look At Lagenda Properties Berhad's Liabilities

We can see from the most recent balance sheet that Lagenda Properties Berhad had liabilities of RM1.02b falling due within a year, and liabilities of RM125.6m due beyond that. Offsetting these obligations, it had cash of RM325.1m as well as receivables valued at RM505.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM310.9m.

While this might seem like a lot, it is not so bad since Lagenda Properties Berhad has a market capitalization of RM1.39b, 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. While it does have liabilities worth noting, Lagenda Properties Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that Lagenda Properties Berhad has seen its EBIT plunge 12% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Lagenda Properties Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Lagenda Properties 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. In the last three years, Lagenda Properties Berhad's free cash flow amounted to 32% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

Although Lagenda Properties Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM22.7m. So we are not troubled with Lagenda Properties Berhad'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. For instance, we've identified 1 warning sign for Lagenda Properties Berhad that 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.

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

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.