We Think Kumpulan Perangsang Selangor Berhad (KLSE:KPS) 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. We note that Kumpulan Perangsang Selangor Berhad (KLSE:KPS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kumpulan Perangsang Selangor Berhad

How Much Debt Does Kumpulan Perangsang Selangor Berhad Carry?

The image below, which you can click on for greater detail, shows that Kumpulan Perangsang Selangor Berhad had debt of RM447.5m at the end of September 2023, a reduction from RM517.4m over a year. But on the other hand it also has RM467.5m in cash, leading to a RM20.0m net cash position.

How Strong Is Kumpulan Perangsang Selangor Berhad's Balance Sheet?

We can see from the most recent balance sheet that Kumpulan Perangsang Selangor Berhad had liabilities of RM365.1m falling due within a year, and liabilities of RM510.4m due beyond that. On the other hand, it had cash of RM467.5m and RM385.9m worth of receivables due within a year. So its liabilities total RM22.1m more than the combination of its cash and short-term receivables.

Given Kumpulan Perangsang Selangor Berhad has a market capitalization of RM424.5m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Kumpulan Perangsang Selangor Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Kumpulan Perangsang Selangor Berhad's EBIT fell a jaw-dropping 36% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Kumpulan Perangsang Selangor Berhad can strengthen its balance sheet over time. 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. Kumpulan Perangsang Selangor 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. Happily for any shareholders, Kumpulan Perangsang Selangor Berhad actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Kumpulan Perangsang Selangor Berhad has RM20.0m in net cash. The cherry on top was that in converted 250% of that EBIT to free cash flow, bringing in RM172m. So we are not troubled with Kumpulan Perangsang Selangor Berhad's debt use. 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. For instance, we've identified 5 warning signs for Kumpulan Perangsang Selangor Berhad (1 can't be ignored) you should be aware of.

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. 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.