Does Kawan Food Berhad (KLSE:KAWAN) Have A Healthy Balance Sheet?

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. We can see that Kawan Food Berhad (KLSE:KAWAN) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kawan Food Berhad

How Much Debt Does Kawan Food Berhad Carry?

The image below, which you can click on for greater detail, shows that Kawan Food Berhad had debt of RM14.0m at the end of September 2020, a reduction from RM16.8m over a year. But on the other hand it also has RM69.1m in cash, leading to a RM55.1m net cash position.

How Healthy Is Kawan Food Berhad's Balance Sheet?

We can see from the most recent balance sheet that Kawan Food Berhad had liabilities of RM51.7m falling due within a year, and liabilities of RM15.7m due beyond that. Offsetting this, it had RM69.1m in cash and RM60.9m in receivables that were due within 12 months. So it can boast RM62.7m more liquid assets than total liabilities.

This surplus suggests that Kawan Food Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Kawan Food Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Kawan Food Berhad has boosted its EBIT by 83%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Kawan Food 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Kawan Food Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Kawan Food Berhad recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Kawan Food Berhad has net cash of RM55.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 83% over the last year. So is Kawan Food Berhad's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Kawan Food Berhad 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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