We Think Kumpulan Fima Berhad (KLSE:KFIMA) Can Manage Its Debt With Ease

Warren Buffett famously said, '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 Kumpulan Fima Berhad (KLSE:KFIMA) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Kumpulan Fima Berhad

How Much Debt Does Kumpulan Fima Berhad Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Kumpulan Fima Berhad had debt of RM37.1m, up from RM33.2m in one year. However, it does have RM274.7m in cash offsetting this, leading to net cash of RM237.6m.

How Healthy Is Kumpulan Fima Berhad's Balance Sheet?

According to the last reported balance sheet, Kumpulan Fima Berhad had liabilities of RM121.7m due within 12 months, and liabilities of RM90.6m due beyond 12 months. On the other hand, it had cash of RM274.7m and RM205.7m worth of receivables due within a year. So it actually has 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. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. 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.

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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kumpulan Fima Berhad's earnings that will influence how the balance sheet holds up in the future. 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 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 it impressed us with its EBIT growth of 62% over the last year. When it comes to Kumpulan Fima Berhad's debt, we sufficiently relaxed that our mind turns to the jacuzzi. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Kumpulan Fima Berhad you should be aware of, and 1 of them is a bit concerning.

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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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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