KUB Malaysia Berhad (KLSE:KUB) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that KUB Malaysia Berhad (KLSE:KUB) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is KUB Malaysia Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 KUB Malaysia Berhad had debt of RM40.7m, up from none in one year. But it also has RM386.5m in cash to offset that, meaning it has RM345.8m net cash.

How Healthy Is KUB Malaysia Berhad's Balance Sheet?

According to the last reported balance sheet, KUB Malaysia Berhad had liabilities of RM144.7m due within 12 months, and liabilities of RM75.5m due beyond 12 months. On the other hand, it had cash of RM386.5m and RM80.2m worth of receivables due within a year. So it actually has RM246.5m more liquid assets than total liabilities.

This luscious liquidity implies that KUB Malaysia Berhad's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, KUB Malaysia Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for KUB Malaysia Berhad

On top of that, KUB Malaysia Berhad grew its EBIT by 50% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since KUB Malaysia Berhad 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While KUB Malaysia 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 last three years, KUB Malaysia Berhad recorded free cash flow worth a fulsome 89% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that KUB Malaysia Berhad has net cash of RM345.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM54m, being 89% of its EBIT. The bottom line is that KUB Malaysia Berhad's use of debt is absolutely fine. 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 example KUB Malaysia Berhad has 3 warning signs (and 1 which is potentially serious) we think you should know about.

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.