Is LBI Capital Berhad (KLSE:LBICAP) A Risky Investment?

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.' 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. We can see that LBI Capital Berhad (KLSE:LBICAP) does use debt in its business. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is LBI Capital Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 LBI Capital Berhad had debt of RM7.85m, up from RM503.6k in one year. However, it does have RM9.79m in cash offsetting this, leading to net cash of RM1.94m.

How Healthy Is LBI Capital Berhad's Balance Sheet?

We can see from the most recent balance sheet that LBI Capital Berhad had liabilities of RM33.3m falling due within a year, and liabilities of RM2.28m due beyond that. On the other hand, it had cash of RM9.79m and RM11.0m worth of receivables due within a year. So it has liabilities totalling RM14.7m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since LBI Capital Berhad has a market capitalization of RM57.3m, 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, LBI Capital Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for LBI Capital Berhad

It was also good to see that despite losing money on the EBIT line last year, LBI Capital Berhad turned things around in the last 12 months, delivering and EBIT of RM5.0m. When analysing debt levels, the balance sheet is the obvious place to start. But it is LBI Capital 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. LBI Capital 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. During the last year, LBI Capital Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While LBI Capital Berhad does have more liabilities than liquid assets, it also has net cash of RM1.94m. So we don't have any problem with LBI Capital Berhad's use of debt. 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. For instance, we've identified 4 warning signs for LBI Capital Berhad (2 are a bit concerning) 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.