Here's Why Kerjaya Prospek Group Berhad (KLSE:KERJAYA) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Kerjaya Prospek Group Berhad (KLSE:KERJAYA) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kerjaya Prospek Group Berhad

How Much Debt Does Kerjaya Prospek Group Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Kerjaya Prospek Group Berhad had RM23.2m of debt in September 2020, down from RM99.4m, one year before. But on the other hand it also has RM205.3m in cash, leading to a RM182.1m net cash position.

How Healthy Is Kerjaya Prospek Group Berhad's Balance Sheet?

We can see from the most recent balance sheet that Kerjaya Prospek Group Berhad had liabilities of RM167.9m falling due within a year, and liabilities of RM132.4m due beyond that. On the other hand, it had cash of RM205.3m and RM347.9m worth of receivables due within a year. So it can boast RM252.9m more liquid assets than total liabilities.

This excess liquidity suggests that Kerjaya Prospek Group Berhad is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Kerjaya Prospek Group 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 Kerjaya Prospek Group Berhad if management cannot prevent a repeat of the 33% 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Kerjaya Prospek Group 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. While Kerjaya Prospek Group Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Kerjaya Prospek Group Berhad recorded free cash flow of 23% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Kerjaya Prospek Group Berhad has net cash of RM182.1m, as well as more liquid assets than liabilities. So we are not troubled with Kerjaya Prospek Group Berhad's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Kerjaya Prospek Group Berhad you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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