Here's Why Ancom Logistics Berhad (KLSE:ANCOMLB) Can Manage Its Debt Responsibly

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. We can see that Ancom Logistics Berhad (KLSE:ANCOMLB) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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 Ancom Logistics Berhad

How Much Debt Does Ancom Logistics Berhad Carry?

The image below, which you can click on for greater detail, shows that Ancom Logistics Berhad had debt of RM7.91m at the end of May 2022, a reduction from RM9.22m over a year. But it also has RM16.6m in cash to offset that, meaning it has RM8.72m net cash.

How Strong Is Ancom Logistics Berhad's Balance Sheet?

We can see from the most recent balance sheet that Ancom Logistics Berhad had liabilities of RM15.2m falling due within a year, and liabilities of RM4.70m due beyond that. Offsetting this, it had RM16.6m in cash and RM4.79m in receivables that were due within 12 months. So it can boast RM1.50m more liquid assets than total liabilities.

This surplus suggests that Ancom Logistics Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Ancom Logistics Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Ancom Logistics Berhad's EBIT fell a jaw-dropping 66% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is Ancom Logistics Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Ancom Logistics 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. Happily for any shareholders, Ancom Logistics Berhad actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ancom Logistics Berhad has RM8.72m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 170% of that EBIT to free cash flow, bringing in RM7.9m. So we are not troubled with Ancom Logistics Berhad's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Ancom Logistics Berhad has 2 warning signs (and 1 which is concerning) we think you should know about.

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.

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.