Is Lum Chang Holdings (SGX:L19) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Lum Chang Holdings Limited (SGX:L19) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Lum Chang Holdings

What Is Lum Chang Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Lum Chang Holdings had S$66.4m of debt in December 2022, down from S$118.3m, one year before. But it also has S$99.7m in cash to offset that, meaning it has S$33.3m net cash.

How Strong Is Lum Chang Holdings' Balance Sheet?

According to the last reported balance sheet, Lum Chang Holdings had liabilities of S$210.5m due within 12 months, and liabilities of S$41.8m due beyond 12 months. Offsetting these obligations, it had cash of S$99.7m as well as receivables valued at S$104.3m due within 12 months. So its liabilities total S$48.3m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Lum Chang Holdings has a market capitalization of S$116.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Lum Chang Holdings 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 it is Lum Chang Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Lum Chang Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 2.2%, to S$409m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Lum Chang Holdings?

While Lum Chang Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow S$39m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Lum Chang Holdings (of which 1 is concerning!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.