Is Komarkcorp Berhad (KLSE:KOMARK) Using Debt 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.' 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 Komarkcorp Berhad (KLSE:KOMARK) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Komarkcorp Berhad

What Is Komarkcorp Berhad's Net Debt?

As you can see below, Komarkcorp Berhad had RM8.88m of debt, at January 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM55.3m in cash offsetting this, leading to net cash of RM46.4m.

How Healthy Is Komarkcorp Berhad's Balance Sheet?

The latest balance sheet data shows that Komarkcorp Berhad had liabilities of RM17.1m due within a year, and liabilities of RM10.7m falling due after that. On the other hand, it had cash of RM55.3m and RM9.56m worth of receivables due within a year. So it can boast RM37.1m more liquid assets than total liabilities.

This surplus strongly suggests that Komarkcorp Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Komarkcorp Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Komarkcorp Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Komarkcorp Berhad had a loss before interest and tax, and actually shrunk its revenue by 9.4%, to RM36m. We would much prefer see growth.

So How Risky Is Komarkcorp Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Komarkcorp Berhad had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of RM6.7m and booked a RM9.7m accounting loss. With only RM46.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Komarkcorp Berhad (1 doesn't sit too well with us) 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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