We Think Keck Seng (Malaysia) Berhad (KLSE:KSENG) Can Stay On Top Of Its Debt

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.' 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. As with many other companies Keck Seng (Malaysia) Berhad (KLSE:KSENG) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 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, 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. 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

What Is Keck Seng (Malaysia) Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that Keck Seng (Malaysia) Berhad had RM220.6m in debt in June 2021; about the same as the year before. But on the other hand it also has RM940.4m in cash, leading to a RM719.8m net cash position.

A Look At Keck Seng (Malaysia) Berhad's Liabilities

According to the last reported balance sheet, Keck Seng (Malaysia) Berhad had liabilities of RM174.5m due within 12 months, and liabilities of RM204.7m due beyond 12 months. Offsetting these obligations, it had cash of RM940.4m as well as receivables valued at RM130.7m due within 12 months. So it actually has RM691.9m more liquid assets than total liabilities.

This surplus liquidity suggests that Keck Seng (Malaysia) Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Keck Seng (Malaysia) Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Keck Seng (Malaysia) Berhad if management cannot prevent a repeat of the 88% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Keck Seng (Malaysia) 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Keck Seng (Malaysia) 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 most recent three years, Keck Seng (Malaysia) Berhad recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Keck Seng (Malaysia) Berhad has RM719.8m in net cash and a decent-looking balance sheet. So we are not troubled with Keck Seng (Malaysia) Berhad's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Keck Seng (Malaysia) Berhad that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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