We Think KUB Malaysia Berhad (KLSE:KUB) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies KUB Malaysia Berhad (KLSE:KUB) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. 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.

See our latest analysis for KUB Malaysia Berhad

How Much Debt Does KUB Malaysia Berhad Carry?

The image below, which you can click on for greater detail, shows that KUB Malaysia Berhad had debt of RM81.5m at the end of September 2020, a reduction from RM128.1m over a year. However, it does have RM192.1m in cash offsetting this, leading to net cash of RM110.6m.

How Healthy Is KUB Malaysia Berhad's Balance Sheet?

The latest balance sheet data shows that KUB Malaysia Berhad had liabilities of RM87.5m due within a year, and liabilities of RM106.0m falling due after that. Offsetting this, it had RM192.1m in cash and RM50.9m in receivables that were due within 12 months. So it actually has RM49.6m more liquid assets than total liabilities.

This surplus suggests that KUB Malaysia Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, KUB Malaysia Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Although KUB Malaysia Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM75m in EBIT over the last twelve months. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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 year, KUB Malaysia Berhad reported free cash flow worth 14% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and 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 RM110.6m, as well as more liquid assets than liabilities. So we are not troubled with KUB Malaysia Berhad's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for KUB Malaysia Berhad (2 don't sit too well with us) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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