Lion Asiapac (SGX:BAZ) Has A Pretty Healthy Balance Sheet

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.' 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. As with many other companies Lion Asiapac Limited (SGX:BAZ) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Lion Asiapac

What Is Lion Asiapac's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Lion Asiapac had debt of S$5.59m, up from none in one year. But it also has S$42.3m in cash to offset that, meaning it has S$36.7m net cash.

A Look At Lion Asiapac's Liabilities

Zooming in on the latest balance sheet data, we can see that Lion Asiapac had liabilities of S$12.7m due within 12 months and liabilities of S$1.57m due beyond that. Offsetting this, it had S$42.3m in cash and S$15.7m in receivables that were due within 12 months. So it can boast S$43.8m more liquid assets than total liabilities.

This surplus strongly suggests that Lion Asiapac has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Lion Asiapac boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Lion Asiapac improved its EBIT from a last year's loss to a positive S$290k. 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 Lion Asiapac 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Lion Asiapac has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Lion Asiapac saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Lion Asiapac has S$36.7m in net cash and a strong balance sheet. So we are not troubled with Lion Asiapac'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. We've identified 3 warning signs with Lion Asiapac (at least 2 which are concerning) , and understanding them should be part of your investment process.

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.