Does Knusford Berhad (KLSE:KNUSFOR) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Knusford Berhad (KLSE:KNUSFOR) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Knusford Berhad

What Is Knusford Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Knusford Berhad had RM49.5m of debt, an increase on RM36.5m, over one year. However, it also had RM16.7m in cash, and so its net debt is RM32.8m.

How Strong Is Knusford Berhad's Balance Sheet?

We can see from the most recent balance sheet that Knusford Berhad had liabilities of RM201.6m falling due within a year, and liabilities of RM1.99m due beyond that. On the other hand, it had cash of RM16.7m and RM245.9m worth of receivables due within a year. So it actually has RM59.0m more liquid assets than total liabilities.

This surplus strongly suggests that Knusford Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Knusford 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.

Over 12 months, Knusford Berhad made a loss at the EBIT level, and saw its revenue drop to RM180m, which is a fall of 34%. That makes us nervous, to say the least.

Caveat Emptor

While Knusford Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost RM1.9m at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That should give the business time to grow its cashflow. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. For instance, we've identified 2 warning signs for Knusford Berhad (1 is a bit concerning) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.