Does Lee Swee Kiat Group Berhad (KLSE:LEESK) have a healthy balance sheet?
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. 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. We can see that Lee Swee Kiat Berhad Group (KLSE:LEESK) uses debt in its business. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Lee Swee Kiat Group Berhad
How much debt does the Lee Swee Kiat Berhad group carry?
As you can see below, Lee Swee Kiat Group Berhad had a debt of RM9.85 million, as of December 2021, which is about the same as the previous year. You can click on the graph for more details. However, his balance sheet shows that he holds RM21.1 million in cash, so he actually has RM11.3 million in net cash.
A look at the responsibilities of Lee Swee Kiat Group Berhad
According to the latest published balance sheet, Lee Swee Kiat Group Berhad had liabilities of RM29.0 million due within 12 months and liabilities of RM11.3 million due beyond 12 months. As compensation for these obligations, it had cash of RM21.1 million and receivables valued at RM13.8 million due within 12 months. Thus, its liabilities total RM5.37 million more than the combination of its cash and short-term receivables.
Given that Lee Swee Kiat Group Berhad has a market capitalization of RM134.3 million, it is hard to believe that these liabilities pose a big threat. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time. While it has liabilities to note, Lee Swee Kiat Group Berhad also has more cash than debt, so we’re pretty confident it can manage its debt safely.
Fortunately, Lee Swee Kiat Group Berhad has increased its EBIT by 9.2% over the past year, making this debt even more manageable. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Lee Swee Kiat Group Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a company cannot pay off its debts with paper profits; he needs cash. Lee Swee Kiat Group Berhad may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both his need for, and his ability to manage the debt. Over the past three years, Lee Swee Kiat Group Berhad has recorded free cash flow of 87% of its EBIT, which is higher than what we would normally expect. This positions him well to pay off debt if desired.
While it is always a good idea to look at a company’s total liabilities, it is very reassuring that Lee Swee Kiat Group Berhad has RM11.3 million in net cash. And it impressed us with free cash flow of RM365,000, or 87% of its EBIT. We therefore do not believe that the use of debt by Lee Swee Kiat Group Berhad is risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 2 warning signs for Lee Swee Kiat Group Berhad which you should be aware of before investing here.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.