Does LYC Healthcare Berhad (KLSE:LYC) Have A Healthy Balance Sheet?

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 note that LYC Healthcare Berhad (KLSE:LYC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for LYC Healthcare Berhad

How Much Debt Does LYC Healthcare Berhad Carry?

The image below, which you can click on for greater detail, shows that at September 2021 LYC Healthcare Berhad had debt of RM89.6m, up from RM2.79m in one year. However, because it has a cash reserve of RM29.2m, its net debt is less, at about RM60.4m.

How Strong Is LYC Healthcare Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that LYC Healthcare Berhad had liabilities of RM19.4m due within 12 months and liabilities of RM124.7m due beyond that. Offsetting these obligations, it had cash of RM29.2m as well as receivables valued at RM16.1m due within 12 months. So it has liabilities totalling RM98.7m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of RM118.5m, so it does suggest shareholders should keep an eye on LYC Healthcare Berhad's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since LYC Healthcare 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.

Over 12 months, LYC Healthcare Berhad reported revenue of RM43m, which is a gain of 229%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Despite the top line growth, LYC Healthcare Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM402k 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM4.1m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. Be aware that LYC Healthcare Berhad is showing 4 warning signs in our investment analysis , and 1 of those is a bit concerning...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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