Kobay Technology Bhd (KLSE:KOBAY) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that Kobay Technology Bhd. (KLSE:KOBAY) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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.

See our latest analysis for Kobay Technology Bhd

How Much Debt Does Kobay Technology Bhd Carry?

The chart below, which you can click on for greater detail, shows that Kobay Technology Bhd had RM49.8m in debt in December 2021; about the same as the year before. However, its balance sheet shows it holds RM115.6m in cash, so it actually has RM65.7m net cash.

How Healthy Is Kobay Technology Bhd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kobay Technology Bhd had liabilities of RM125.1m due within 12 months and liabilities of RM28.8m due beyond that. Offsetting these obligations, it had cash of RM115.6m as well as receivables valued at RM90.1m due within 12 months. So it can boast RM51.8m more liquid assets than total liabilities.

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

In addition to that, we're happy to report that Kobay Technology Bhd has boosted its EBIT by 82%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Kobay Technology Bhd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Kobay Technology Bhd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Kobay Technology Bhd has RM65.7m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 82% over the last year. So we don't have any problem with Kobay Technology Bhd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Kobay Technology Bhd (1 doesn't sit too well with us!) that you should be aware of before investing here.

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. 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.