Lion Asiapac (SGX:BAZ) Could Easily Take On More Debt

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. We note that Lion Asiapac Limited (SGX:BAZ) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Lion Asiapac's Debt?

As you can see below, Lion Asiapac had S$5.23m of debt at December 2024, down from S$5.51m a year prior. However, its balance sheet shows it holds S$44.2m in cash, so it actually has S$39.0m net cash.

A Look At Lion Asiapac's Liabilities

According to the last reported balance sheet, Lion Asiapac had liabilities of S$11.3m due within 12 months, and liabilities of S$1.41m due beyond 12 months. Offsetting this, it had S$44.2m in cash and S$11.0m in receivables that were due within 12 months. So it actually has S$42.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that Lion Asiapac's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Lion Asiapac has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Lion Asiapac

Notably, Lion Asiapac made a loss at the EBIT level, last year, but improved that to positive EBIT of S$148k in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lion Asiapac'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Lion Asiapac 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. Over the last year, Lion Asiapac actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that Lion Asiapac has net cash of S$39.0m and plenty of liquid assets. The cherry on top was that in converted 761% of that EBIT to free cash flow, bringing in S$1.1m. So we don't think Lion Asiapac's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Lion Asiapac has 3 warning signs (and 1 which is a bit concerning) we think 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.