Warren Buffett said: “Volatility is far from synonymous with risk”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Resintech Berhad (KLSE: RESINTC) uses the debt. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
What is Resintech Berhad’s debt?
The image below, which you can click for more details, shows that as of December 2020, Resintech Berhad had a debt of RM 26.9 million, compared to RM 25.4 million in one year. However, he also had RM16.8 million in cash, so his net debt is RM10.1 million.
A look at the responsibilities of Resintech Berhad
The latest balance sheet data shows that Resintech Berhad had debts of RM 31.4 million due within one year, and debts of RM 24.2 million due thereafter. In return, he had RM16.8 million in cash and RM38.3 million in receivables due within 12 months. Thus, its total liabilities correspond more or less perfectly to its short-term liquid assets.
This state of affairs indicates that Resintech Berhad’s balance sheet looks quite strong, as its total liabilities roughly equal its liquid assets. So the RM 57.6million company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
With net debt of just 0.85 times EBITDA, Resintech Berhad is arguably fairly cautious. And this view is underpinned by the strong interest coverage, with EBIT reaching 8.2 times last year’s interest expense. On top of that, Resintech Berhad has increased its EBIT by 93% over the past twelve months, and this growth will make it easier to process its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Resintech Berhad that will influence the balance sheet in the future. So if you want to know more about his earnings, it might be worth checking out this graph of his long-term profit trend.
Finally, a business can only pay off its debts with hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Resintech Berhad has recorded free cash flow of 72% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
Fortunately, Resintech Berhad’s impressive EBIT growth rate means it has the upper hand over its debt. And this is only the beginning of good news as its conversion from EBIT to free cash flow is also very encouraging. Considering this range of factors, it seems to us that Resintech Berhad is fairly cautious with its debt, and the risks appear to be well under control. We are therefore not worried about the use of a small leverage on the balance sheet. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 4 warning signs for Resintech Berhad (of which 1 is of concern!) that you should know about.
If, after all of this, you’re more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of cash net growth stocks without delay.
When trading Resintech Berhad or any other investment, use the platform seen by many as the professionals’ gateway to the global market, Interactive brokers. You get the cheapest * trading on stocks, options, futures, forex, bonds and funds from around the world from a single integrated account. Promoted
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares 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 the mentioned stocks.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Online Annual Review 2020
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.