Is Kim Loong Resources Berhad (KLSE:KMLOONG) A Risky Investment?

Warren Buffett famously said, '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 Kim Loong Resources Berhad (KLSE:KMLOONG) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kim Loong Resources Berhad

What Is Kim Loong Resources Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at January 2021 Kim Loong Resources Berhad had debt of RM49.3m, up from RM14.3m in one year. However, it does have RM338.0m in cash offsetting this, leading to net cash of RM288.7m.

How Healthy Is Kim Loong Resources Berhad's Balance Sheet?

We can see from the most recent balance sheet that Kim Loong Resources Berhad had liabilities of RM114.7m falling due within a year, and liabilities of RM127.7m due beyond that. Offsetting this, it had RM338.0m in cash and RM51.8m in receivables that were due within 12 months. So it actually has RM147.4m more liquid assets than total liabilities.

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

Better yet, Kim Loong Resources Berhad grew its EBIT by 148% last year, which is an impressive improvement. 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 ultimately the future profitability of the business will decide if Kim Loong Resources Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Kim Loong Resources 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. During the last three years, Kim Loong Resources Berhad produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Kim Loong Resources Berhad has net cash of RM288.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 148% year-on-year EBIT growth. So we don't think Kim Loong Resources Berhad's use of debt is risky. 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 Kim Loong Resources 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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