Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies Berhad integrated logistics (KLSE:ILB) uses debt. But the more important question is: what risk does this debt create?
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies 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
How much debt does Integrated Logistics Berhad have?
As you can see below, Integrated Logistics Berhad had a debt of RM53.0 million in September 2021, compared to RM72.7 million the previous year. However, he has RM79.4 million in cash to offset this, resulting in a net cash of RM26.4 million.
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 RM9.74 million falling due within one year, and liabilities of RM49.0 million due beyond. In return, he had RM79.4 million in cash and RM15.6 million in receivables due within 12 months. Thus, he can boast of having RM36.2 million more liquid assets than total Passives.
This surplus strongly suggests that Integrated Logistics Berhad has a rock-solid balance sheet (and debt is nothing to worry about). With that in mind, one could argue that its track record means the company is capable of dealing with some adversity. In short, Integrated Logistics Berhad has net cash, so it’s fair to say that it doesn’t have a lot of debt!
We also note that Integrated Logistics Berhad improved its EBIT from a loss last year to a positive RM648k. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Integrated Logistics Berhad that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Finally, while the taxman may love accounting profits, lenders only accept cash. Integrated Logistics Berhad may have net cash on the balance sheet, but it is always interesting to see the extent to which the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its ability to manage debt. Over the past year, Integrated Logistics Berhad has burned a lot of money. While investors no doubt expect a reversal of this situation in due course, this clearly means that its use of debt is more risky.
While it is always a good idea to investigate a company’s debt, in this case, Integrated Logistics Berhad has RM26.4 million in net cash and a decent balance sheet. We are therefore not concerned about the use of Integrated Logistics Berhad’s debt. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 4 warning signs for Integrated Logistics Berhad (1 is concerning) that you should be aware of.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.