Is Complete Logistic Services Berhad (KLSE:COMPLET) A Risky Investment?

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.' 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 Complete Logistic Services Berhad (KLSE:COMPLET) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Complete Logistic Services Berhad

How Much Debt Does Complete Logistic Services Berhad Carry?

The image below, which you can click on for greater detail, shows that Complete Logistic Services Berhad had debt of RM14.2m at the end of September 2020, a reduction from RM23.5m over a year. But on the other hand it also has RM80.9m in cash, leading to a RM66.7m net cash position.

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

According to the last reported balance sheet, Complete Logistic Services Berhad had liabilities of RM21.1m due within 12 months, and liabilities of RM28.2m due beyond 12 months. On the other hand, it had cash of RM80.9m and RM14.3m worth of receivables due within a year. So it can boast RM45.9m more liquid assets than total liabilities.

This surplus strongly suggests that Complete Logistic Services Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. 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 53% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Looking at the most recent three years, Complete Logistic Services Berhad recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

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 RM66.7m, as well as more liquid assets than liabilities. So we don't have any problem with Complete Logistic Services Berhad's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Complete Logistic Services Berhad (including 1 which is a bit unpleasant) .

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.

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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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