Is ILB Group Berhad (KLSE:ILB) Using Too Much Debt?

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 ILB Group Berhad (KLSE:ILB) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for ILB Group Berhad

How Much Debt Does ILB Group Berhad Carry?

The image below, which you can click on for greater detail, shows that ILB Group Berhad had debt of RM25.7m at the end of June 2023, a reduction from RM50.2m over a year. But on the other hand it also has RM61.1m in cash, leading to a RM35.3m net cash position.

A Look At ILB Group Berhad's Liabilities

According to the last reported balance sheet, ILB Group Berhad had liabilities of RM14.4m due within 12 months, and liabilities of RM23.1m due beyond 12 months. On the other hand, it had cash of RM61.1m and RM20.7m worth of receivables due within a year. So it actually has RM44.3m more liquid assets than total liabilities.

This luscious liquidity implies that ILB Group Berhad's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that ILB Group Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, ILB Group Berhad made a loss at the EBIT level, last year, but improved that to positive EBIT of RM1.4m in the last twelve months. 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 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ILB Group 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. During the last year, ILB Group Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that ILB Group Berhad has net cash of RM35.3m, as well as more liquid assets than liabilities. So we don't have any problem with ILB Group 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. Be aware that ILB Group Berhad is showing 3 warning signs in our investment analysis , and 2 of those are a bit concerning...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.