Rimbunan Sawit Berhad (KLSE: RSAWIT) has debt but no income; Should you be worried?
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Above all, Rimbunan Sawit Berhad (KLSE:RSAWIT) is in debt. But the more important question is: what risk does this debt create?
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. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business 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 Rimbunan Sawit Berhad
What is Rimbunan Sawit Berhad’s debt?
As you can see below, Rimbunan Sawit Berhad had RM385.6 million in debt as of September 2021, up from RM415.1 million the previous year. Net debt is about the same, since she doesn’t have a lot of cash.
How healthy is Rimbunan Sawit Berhad’s balance sheet?
We can see from the most recent balance sheet that Rimbunan Sawit Berhad had liabilities of RM298.6 million falling due within one year, and liabilities of RM241.2 million due beyond. In return, he had RM2.29 million in cash and RM37.1 million in debt due within 12 months. It therefore has liabilities totaling RM500.4 million more than its cash and short-term receivables, combined.
When you consider that this shortfall exceeds the company’s market cap of RM490.0 million, you might be inclined to take a close look at the balance sheet. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price. When analyzing debt levels, the balance sheet is the obvious starting point. But it is Rimbunan Sawit Berhad’s income 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.
Over 12 months, Rimbunan Sawit Berhad reported revenue of RM487 million, a gain of 35%, although it reported no earnings before interest and tax. With a little luck, the company will be able to progress towards profitability.
While we can certainly appreciate Rimbunan Sawit Berhad’s revenue growth, its earnings before interest and tax (EBIT) loss is less than ideal. Indeed, it lost RM26 million in EBIT. When we look at this alongside significant liabilities, we are not particularly confident about the business. We would like to see strong improvements in the short term before getting too interested in the title. Not least because it had a negative free cash flow of RM17 million in the last twelve months. So suffice it to say that we consider the stock to be 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 – Rimbunan Sawit Berhad has 1 warning sign we think you should know.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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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.