Kim Loong Resources Berhad (KLSE:KMLOONG) Could Easily Take On More Debt

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.' 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. We note that Kim Loong Resources Berhad (KLSE:KMLOONG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for Kim Loong Resources Berhad

What Is Kim Loong Resources Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of October 2020 Kim Loong Resources Berhad had RM50.4m of debt, an increase on RM15.6m, over one year. But it also has RM386.9m in cash to offset that, meaning it has RM336.6m net cash.

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

Zooming in on the latest balance sheet data, we can see that Kim Loong Resources Berhad had liabilities of RM136.0m due within 12 months and liabilities of RM128.5m due beyond that. On the other hand, it had cash of RM386.9m and RM50.1m worth of receivables due within a year. So it can boast RM172.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Kim Loong Resources Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Kim Loong Resources Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Kim Loong Resources Berhad grew its EBIT by 109% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kim Loong Resources Berhad's earnings that will influence how the balance sheet holds up in the future. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Kim Loong Resources Berhad recorded free cash flow worth a fulsome 81% 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 Kim Loong Resources Berhad has net cash of RM336.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM108m, being 81% of its EBIT. 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. For example Kim Loong Resources Berhad has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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