Complete Logistic Services Berhad (KLSE:COMPLET) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Complete Logistic Services Berhad (KLSE:COMPLET) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Complete Logistic Services Berhad

What Is Complete Logistic Services Berhad's Debt?

As you can see below, Complete Logistic Services Berhad had RM18.3m of debt at December 2020, down from RM21.8m a year prior. But on the other hand it also has RM79.5m in cash, leading to a RM61.1m net cash position.

How Strong Is Complete Logistic Services Berhad's Balance Sheet?

The latest balance sheet data shows that Complete Logistic Services Berhad had liabilities of RM19.1m due within a year, and liabilities of RM32.4m falling due after that. Offsetting these obligations, it had cash of RM79.5m as well as receivables valued at RM14.0m due within 12 months. So it actually has RM42.0m more liquid assets than total liabilities.

This surplus suggests that Complete Logistic Services Berhad is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Complete Logistic Services Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Complete Logistic Services Berhad's EBIT was down 81% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Complete Logistic Services 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Complete Logistic Services 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. In the last three years, Complete Logistic Services Berhad's free cash flow amounted to 34% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Complete Logistic Services Berhad has net cash of RM61.1m, as well as more liquid assets than liabilities. So we don't have any problem with Complete Logistic Services 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. To that end, you should learn about the 4 warning signs we've spotted with Complete Logistic Services Berhad (including 1 which shouldn't be ignored) .

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. 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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