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

Warren Buffett famously said, '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 note that Kawan Food Berhad (KLSE:KAWAN) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 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 Kawan Food Berhad

How Much Debt Does Kawan Food Berhad Carry?

As you can see below, Kawan Food Berhad had RM13.1m of debt at March 2021, down from RM15.7m a year prior. However, it does have RM73.2m in cash offsetting this, leading to net cash of RM60.0m.

A Look At Kawan Food Berhad's Liabilities

The latest balance sheet data shows that Kawan Food Berhad had liabilities of RM51.6m due within a year, and liabilities of RM14.1m falling due after that. Offsetting these obligations, it had cash of RM73.2m as well as receivables valued at RM51.0m due within 12 months. So it actually has RM58.5m 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.

Even more impressive was the fact that Kawan Food Berhad grew its EBIT by 102% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Kawan Food Berhad's ability to maintain a healthy balance sheet going forward. 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. 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. During the last three years, Kawan Food Berhad produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Kawan Food Berhad has RM60.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 102% year-on-year EBIT growth. So we don't think Kawan Food Berhad's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Kawan Food Berhad's earnings per share history for free.

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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