Warren Buffett famously said, '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. We can see that Kelington Group Berhad (KLSE:KGB) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Kelington Group Berhad's Debt?
The chart below, which you can click on for greater detail, shows that Kelington Group Berhad had RM45.5m in debt in September 2021; about the same as the year before. But it also has RM84.5m in cash to offset that, meaning it has RM39.0m net cash.
How Healthy Is Kelington Group Berhad's Balance Sheet?
We can see from the most recent balance sheet that Kelington Group Berhad had liabilities of RM137.7m falling due within a year, and liabilities of RM29.9m due beyond that. Offsetting this, it had RM84.5m in cash and RM174.0m in receivables that were due within 12 months. So it actually has RM90.9m more liquid assets than total liabilities.
This surplus suggests that Kelington Group Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Kelington Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!
Also positive, Kelington Group Berhad grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Kelington Group Berhad can strengthen its balance sheet over time. 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. Kelington Group 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. Considering the last three years, Kelington Group Berhad actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.
While we empathize with investors who find debt concerning, you should keep in mind that Kelington Group Berhad has net cash of RM39.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 29% year-on-year EBIT growth. So we are not troubled with Kelington Group Berhad's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Kelington Group Berhad, you may well want to click here to check an interactive graph of its earnings per share history.
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.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.