Kobay Technology Bhd (KLSE:KOBAY) Has A Pretty Healthy Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Kobay Technology Bhd. (KLSE:KOBAY) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Kobay Technology Bhd

How Much Debt Does Kobay Technology Bhd Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Kobay Technology Bhd had RM50.4m of debt, an increase on RM35.8m, over one year. But on the other hand it also has RM91.4m in cash, leading to a RM41.0m net cash position.

How Healthy Is Kobay Technology Bhd's Balance Sheet?

According to the last reported balance sheet, Kobay Technology Bhd had liabilities of RM67.0m due within 12 months, and liabilities of RM30.6m due beyond 12 months. On the other hand, it had cash of RM91.4m and RM50.8m worth of receivables due within a year. So it can boast RM44.6m more liquid assets than total liabilities.

This surplus suggests that Kobay Technology Bhd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Kobay Technology Bhd boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Kobay Technology Bhd grew its EBIT by 5.5% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kobay Technology Bhd'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. While Kobay Technology Bhd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Kobay Technology Bhd's free cash flow amounted to 25% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Kobay Technology Bhd has net cash of RM41.0m, as well as more liquid assets than liabilities. And it also grew its EBIT by 5.5% over the last year. So we don't have any problem with Kobay Technology Bhd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Kobay Technology Bhd that you should be aware of.

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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