Kumpulan Fima Berhad (KLSE:KFIMA) Has A Rock Solid Balance Sheet

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.' 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. As with many other companies Kumpulan Fima Berhad (KLSE:KFIMA) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Kumpulan Fima Berhad

How Much Debt Does Kumpulan Fima Berhad Carry?

As you can see below, at the end of September 2020, Kumpulan Fima Berhad had RM37.1m of debt, up from RM33.2m a year ago. Click the image for more detail. But on the other hand it also has RM274.7m in cash, leading to a RM237.6m net cash position.

How Strong Is Kumpulan Fima Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kumpulan Fima Berhad had liabilities of RM121.7m due within 12 months and liabilities of RM90.6m due beyond that. On the other hand, it had cash of RM274.7m and RM205.7m worth of receivables due within a year. So it can boast RM268.0m 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. Succinctly put, Kumpulan Fima Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Kumpulan Fima Berhad has boosted its EBIT by 62%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Kumpulan Fima Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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 produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Kumpulan Fima Berhad has RM237.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 62% year-on-year EBIT growth. When it comes to Kumpulan Fima Berhad's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. We've identified 2 warning signs with Kumpulan Fima Berhad (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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