Analabs Resources Berhad (KLSE:ANALABS) has a fairly 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. Like many other companies Analabs Resources (KLSE:ANALABS) uses debt. But should shareholders worry about its use of debt?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for Analabs Resources Berhad
How much debt does Analabs Resources Berhad have?
As you can see below, at the end of October 2021, Analabs Resources Berhad had a debt of RM77.2 million, compared to RM37.1 million a year ago. Click on the image for more details. However, he also had RM30.4 million in cash, so his net debt is RM46.8 million.
How strong is Analabs Resources Berhad’s balance sheet?
The latest balance sheet data shows that Analabs Resources Berhad had liabilities of RM91.4 million due within one year, and liabilities of RM34.7 million falling due thereafter. On the other hand, it had liquid assets of RM30.4 million and RM28.8 million of receivables due within the year. It therefore has liabilities totaling RM66.9 million more than its cash and short-term receivables, combined.
While that might sound like a lot, it’s not that bad since Analabs Resources Berhad has a market capitalization of RM150.3 million, and so it could probably bolster its balance sheet by raising capital if needed. However, it is always worth taking a close look at its ability to repay debt.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). Thus, we consider debt to earnings with and without amortization and depreciation expense.
We would say that Analabs Resources Berhad’s moderate net debt to EBITDA ratio (1.9) is indicative of leverage caution. And its towering EBIT of 1,000 times its interest expense means that the debt burden is as light as a peacock feather. Fortunately, Analabs Resources Berhad is growing its EBIT faster than former Australian Prime Minister Bob Hawke dropped a yard glass, with a 170% gain over the last twelve months. When analyzing debt levels, the balance sheet is the obvious starting point. But it is Analabs Resources Berhad’s earnings that will influence the balance sheet going forward. 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. It is therefore worth checking how much of this EBIT is supported by free cash flow. Luckily for all shareholders, Analabs Resources Berhad has actually produced more free cash flow than EBIT over the past three years. There’s nothing better than incoming money to stay in the good books of your lenders.
Our point of view
The good news is that Analabs Resources Berhad’s demonstrated ability to cover its interest charges with its EBIT delights us like a fluffy puppy does a toddler. But truth be told, we think his total passive level undermines that impression a bit. Zooming out, Analabs Resources Berhad appears to be using debt quite sensibly; and that gets the green light from us. Although debt carries risks, when used wisely, it can also generate a higher return on equity. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. Know that Analabs Resources Berhad shows 1 warning sign in our investment analysis , you should know…
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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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.