Is Kumpulan Fima Berhad (KLSE:KFIMA) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Kumpulan Fima Berhad (KLSE:KFIMA) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Kumpulan Fima Berhad

How Much Debt Does Kumpulan Fima Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Kumpulan Fima Berhad had RM39.6m of debt, an increase on RM37.3m, over one year. But it also has RM366.0m in cash to offset that, meaning it has RM326.3m net cash.

How Healthy Is Kumpulan Fima Berhad's Balance Sheet?

The latest balance sheet data shows that Kumpulan Fima Berhad had liabilities of RM142.5m due within a year, and liabilities of RM87.4m falling due after that. Offsetting this, it had RM366.0m in cash and RM141.9m in receivables that were due within 12 months. So it can boast RM277.9m more liquid assets than total liabilities.

This luscious liquidity implies that Kumpulan Fima Berhad's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Kumpulan Fima Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Kumpulan Fima Berhad grew its EBIT by 191% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kumpulan Fima Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Kumpulan Fima 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, Kumpulan Fima Berhad generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Kumpulan Fima Berhad has RM326.3m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in RM136m. At the end of the day we're not concerned about Kumpulan Fima Berhad's debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Kumpulan Fima Berhad (of which 1 is a bit concerning!) 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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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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