Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Chandelier Industries Bhd (KLSE: LUSTER) uses debt. But does this debt worry shareholders?
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest review for Luster Industries Bhd
How much debt does Luster Industries Bhd have?
You can click on the graph below for historical figures, but it shows that as of September 2021, Luster Industries Bhd had a debt of RM16.1million, an increase from RM13.8million, over a year. However, he has RM76.4million in cash offsetting this, which leads to a net cash position of RM60.3million.
How healthy is Luster Industries Bhd’s balance sheet?
The latest balance sheet data shows that Luster Industries Bhd had liabilities of RM 111.3 million due within one year, and RM 40.0 million liabilities due after that. In compensation for these obligations, he had cash of RM 76.4 million as well as receivables valued at RM 176.9 million due within 12 months. So it actually has RM101.9m Following liquid assets as total liabilities.
This surplus suggests that Luster Industries Bhd is using the debt in a way that seems both safe and conservative. Because he has a lot of assets, he is unlikely to have any problems with his lenders. Simply put, the fact that Luster Industries Bhd has more cash than debt is arguably a good indication that it can safely manage its debt.
Also good is that Luster Industries Bhd has increased its EBIT to 20% over the past year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Luster Industries Bhd that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. Although Luster Industries Bhd has net cash on its balance sheet, it is still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is building. (or erode) that cash balance. Over the past three years Luster Industries Bhd has spent a lot of money. While investors no doubt expect this situation to reverse in due course, this clearly means that its use of debt is riskier.
In summary
While it is always a good idea to investigate a company’s debt, in this case Luster Industries Bhd has RM60.3million in net cash and a decent balance sheet. And it impressed us with its 20% EBIT growth over last year. We are therefore not concerned about the use of debt by Luster Industries Bhd. 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 off the balance sheet. Concrete example: we have spotted 2 warning signs for Luster Industries Bhd you need to be aware of it, and one of them is a little rude.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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