These 4 Measures Indicate That Kerjaya Prospek Group Berhad (KLSE:KERJAYA) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Kerjaya Prospek Group Berhad (KLSE:KERJAYA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kerjaya Prospek Group Berhad

What Is Kerjaya Prospek Group Berhad's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Kerjaya Prospek Group Berhad had debt of RM80.6m, up from RM22.9m in one year. But on the other hand it also has RM266.7m in cash, leading to a RM186.1m net cash position.

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

Zooming in on the latest balance sheet data, we can see that Kerjaya Prospek Group Berhad had liabilities of RM245.1m due within 12 months and liabilities of RM136.8m due beyond that. Offsetting this, it had RM266.7m in cash and RM359.5m in receivables that were due within 12 months. So it actually has RM244.5m 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!

It is just as well that Kerjaya Prospek Group Berhad's load is not too heavy, because its EBIT was down 34% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 27% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Kerjaya Prospek Group Berhad has RM186.1m in net cash and a decent-looking balance sheet. So we are not troubled with Kerjaya Prospek Group Berhad's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Kerjaya Prospek Group Berhad is showing 1 warning sign in our investment analysis , you should know about...

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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