ILB Group Berhad (KLSE:ILB) Is Using Debt Safely

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that ILB Group Berhad (KLSE:ILB) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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.

Check out our latest analysis for ILB Group Berhad

How Much Debt Does ILB Group Berhad Carry?

As you can see below, ILB Group Berhad had RM50.2m of debt at June 2022, down from RM59.1m a year prior. But on the other hand it also has RM94.1m in cash, leading to a RM43.9m net cash position.

How Healthy Is ILB Group Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ILB Group Berhad had liabilities of RM36.4m due within 12 months and liabilities of RM27.3m due beyond that. On the other hand, it had cash of RM94.1m and RM13.1m worth of receivables due within a year. So it can boast RM43.5m more liquid assets than total liabilities.

This surplus liquidity suggests that ILB Group Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, ILB Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ILB Group 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.

In the last year ILB Group Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 152%, to RM21m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is ILB Group Berhad?

Although ILB Group Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of RM4.0m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 152% is a good sign. We'd see further strong growth as an optimistic indication. There's no doubt that we learn most about debt from the balance sheet. 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 ILB Group Berhad (including 1 which is potentially serious) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.