These 4 Measures Indicate That Rhong Khen International Berhad (KLSE:RKI) Is Using Debt Safely

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Rhong Khen International Berhad (KLSE:RKI) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Rhong Khen International Berhad

What Is Rhong Khen International Berhad's Debt?

As you can see below, Rhong Khen International Berhad had RM14.4m of debt at September 2024, down from RM23.4m a year prior. But on the other hand it also has RM270.9m in cash, leading to a RM256.5m net cash position.

A Look At Rhong Khen International Berhad's Liabilities

The latest balance sheet data shows that Rhong Khen International Berhad had liabilities of RM85.8m due within a year, and liabilities of RM17.6m falling due after that. On the other hand, it had cash of RM270.9m and RM51.5m worth of receivables due within a year. So it can boast RM219.0m more liquid assets than total liabilities.

This luscious liquidity implies that Rhong Khen International Berhad's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Rhong Khen International Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Rhong Khen International Berhad has increased its EBIT by 4.3% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Rhong Khen International 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Rhong Khen International 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. Happily for any shareholders, Rhong Khen International Berhad actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Rhong Khen International Berhad has net cash of RM256.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM41m, being 183% of its EBIT. When it comes to Rhong Khen International Berhad's debt, we sufficiently relaxed that our mind turns to the jacuzzi. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Rhong Khen International Berhad you should know about.

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.