Here's Why Integrated Logistics Berhad (KLSE:ILB) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Integrated Logistics Berhad (KLSE:ILB) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Integrated Logistics Berhad

What Is Integrated Logistics Berhad's Debt?

As you can see below, Integrated Logistics Berhad had RM53.0m of debt at September 2021, down from RM72.7m a year prior. However, it does have RM79.4m in cash offsetting this, leading to net cash of RM26.4m.

How Healthy Is Integrated Logistics Berhad's Balance Sheet?

We can see from the most recent balance sheet that Integrated Logistics Berhad had liabilities of RM9.74m falling due within a year, and liabilities of RM49.0m due beyond that. Offsetting this, it had RM79.4m in cash and RM15.6m in receivables that were due within 12 months. So it can boast RM36.2m more liquid assets than total liabilities.

This surplus strongly suggests that Integrated Logistics Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Integrated Logistics Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Integrated Logistics Berhad improved its EBIT from a last year's loss to a positive RM648k. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Integrated Logistics Berhad's earnings that will influence how the balance sheet holds up in the future. 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. Integrated 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. During the last year, Integrated Logistics 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 it is always sensible to investigate a company's debt, in this case Integrated Logistics Berhad has RM26.4m in net cash and a decent-looking balance sheet. So we are not troubled with Integrated Logistics Berhad's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Integrated Logistics Berhad (1 is concerning) you should be aware of.

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.