Does Frontken Corporation Berhad (KLSE:FRONTKN) Have A 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.' 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 can see that Frontken Corporation Berhad (KLSE:FRONTKN) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Frontken Corporation Berhad

What Is Frontken Corporation Berhad's Debt?

As you can see below, at the end of December 2022, Frontken Corporation Berhad had RM19.7m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds RM342.0m in cash, so it actually has RM322.3m net cash.

A Look At Frontken Corporation Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Frontken Corporation Berhad had liabilities of RM190.1m due within 12 months and liabilities of RM32.0m due beyond that. Offsetting these obligations, it had cash of RM342.0m as well as receivables valued at RM141.8m due within 12 months. So it can boast RM261.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Frontken Corporation Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Frontken Corporation Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Frontken Corporation Berhad has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Frontken Corporation Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Frontken Corporation Berhad 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 most recent three years, Frontken Corporation Berhad recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Frontken Corporation Berhad has net cash of RM322.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 21% year-on-year EBIT growth. So we don't think Frontken Corporation Berhad's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Frontken Corporation Berhad, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.