These 4 Measures Indicate That Kelington Group Berhad (KLSE:KGB) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Kelington Group Berhad (KLSE:KGB) does carry debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. 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. 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.

What Is Kelington Group Berhad's Net Debt?

As you can see below, at the end of March 2025, Kelington Group Berhad had RM161.2m of debt, up from RM153.5m a year ago. Click the image for more detail. However, it does have RM445.8m in cash offsetting this, leading to net cash of RM284.5m.

A Look At Kelington Group Berhad's Liabilities

The latest balance sheet data shows that Kelington Group Berhad had liabilities of RM595.4m due within a year, and liabilities of RM94.1m falling due after that. Offsetting this, it had RM445.8m in cash and RM475.3m in receivables that were due within 12 months. So it can boast RM231.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Kelington Group Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Kelington Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Kelington Group Berhad

The good news is that Kelington Group Berhad has increased its EBIT by 8.8% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. 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. Over the most recent three years, Kelington Group Berhad recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kelington Group Berhad has net cash of RM284.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 78% of that EBIT to free cash flow, bringing in RM150m. So is Kelington Group Berhad's debt a risk? It doesn't seem so to us. 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. Be aware that Kelington Group Berhad is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.