We Think Kobay Technology Bhd (KLSE:KOBAY) Can Stay On Top Of Its Debt

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. As with many other companies Kobay Technology Bhd. (KLSE:KOBAY) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Kobay Technology Bhd

What Is Kobay Technology Bhd's Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Kobay Technology Bhd had debt of RM42.6m, up from RM37.3m in one year. But on the other hand it also has RM71.9m in cash, leading to a RM29.3m net cash position.

How Strong 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 RM50.4m due within 12 months and liabilities of RM36.6m due beyond that. Offsetting this, it had RM71.9m in cash and RM50.3m in receivables that were due within 12 months. So it can boast RM35.2m 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!

On the other hand, Kobay Technology Bhd saw its EBIT drop by 8.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kobay Technology Bhd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kobay Technology Bhd 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 last three years, Kobay Technology Bhd reported free cash flow worth 14% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Kobay Technology Bhd has RM29.3m in net cash and a decent-looking balance sheet. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Kobay Technology Bhd you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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