These 4 Measures Indicate That George Kent (Malaysia) Berhad (KLSE:GKENT) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies George Kent (Malaysia) Berhad (KLSE:GKENT) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for George Kent (Malaysia) Berhad

What Is George Kent (Malaysia) Berhad's Net Debt?

As you can see below, George Kent (Malaysia) Berhad had RM73.0m of debt, at October 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds RM233.1m in cash, so it actually has RM160.0m net cash.

How Healthy Is George Kent (Malaysia) Berhad's Balance Sheet?

The latest balance sheet data shows that George Kent (Malaysia) Berhad had liabilities of RM171.2m due within a year, and liabilities of RM2.70m falling due after that. Offsetting these obligations, it had cash of RM233.1m as well as receivables valued at RM208.5m due within 12 months. So it actually has RM267.6m more liquid assets than total liabilities.

This excess liquidity is a great indication that George Kent (Malaysia) Berhad's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, George Kent (Malaysia) Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for George Kent (Malaysia) Berhad if management cannot prevent a repeat of the 48% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine George Kent (Malaysia) Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. George Kent (Malaysia) Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, George Kent (Malaysia) Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that George Kent (Malaysia) Berhad has net cash of RM160.0m, as well as more liquid assets than liabilities. So we are not troubled with George Kent (Malaysia) Berhad's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for George Kent (Malaysia) Berhad that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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