Does Keck Seng (Malaysia) Berhad (KLSE:KSENG) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Keck Seng (Malaysia) Berhad (KLSE:KSENG) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Keck Seng (Malaysia) Berhad

How Much Debt Does Keck Seng (Malaysia) Berhad Carry?

The chart below, which you can click on for greater detail, shows that Keck Seng (Malaysia) Berhad had RM229.5m in debt in December 2020; about the same as the year before. However, its balance sheet shows it holds RM935.8m in cash, so it actually has RM706.4m net cash.

How Strong Is Keck Seng (Malaysia) Berhad's Balance Sheet?

According to the last reported balance sheet, Keck Seng (Malaysia) Berhad had liabilities of RM173.0m due within 12 months, and liabilities of RM188.7m due beyond 12 months. Offsetting these obligations, it had cash of RM935.8m as well as receivables valued at RM112.7m due within 12 months. So it can boast RM686.9m more liquid assets than total liabilities.

This surplus strongly suggests that Keck Seng (Malaysia) Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Keck Seng (Malaysia) Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Keck Seng (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.

Over 12 months, Keck Seng (Malaysia) Berhad made a loss at the EBIT level, and saw its revenue drop to RM874m, which is a fall of 11%. We would much prefer see growth.

So How Risky Is Keck Seng (Malaysia) Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Keck Seng (Malaysia) Berhad had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through RM35m of cash and made a loss of RM65m. With only RM706.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Keck Seng (Malaysia) Berhad you should know about.

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.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.