Does Comfort Gloves Berhad (KLSE:COMFORT) 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.' 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 can see that Comfort Gloves Berhad (KLSE:COMFORT) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Comfort Gloves Berhad

How Much Debt Does Comfort Gloves Berhad Carry?

The chart below, which you can click on for greater detail, shows that Comfort Gloves Berhad had RM81.9m in debt in October 2021; about the same as the year before. However, its balance sheet shows it holds RM344.3m in cash, so it actually has RM262.4m net cash.

How Healthy Is Comfort Gloves Berhad's Balance Sheet?

According to the last reported balance sheet, Comfort Gloves Berhad had liabilities of RM186.7m due within 12 months, and liabilities of RM46.8m due beyond 12 months. Offsetting these obligations, it had cash of RM344.3m as well as receivables valued at RM162.3m due within 12 months. So it actually has RM273.2m more liquid assets than total liabilities.

This surplus liquidity suggests that Comfort Gloves Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Comfort Gloves Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Comfort Gloves Berhad grew its EBIT by 236% 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 it is Comfort Gloves Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Comfort Gloves 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. Looking at the most recent three years, Comfort Gloves Berhad recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Comfort Gloves Berhad has RM262.4m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 236% over the last year. The bottom line is that we do not find Comfort Gloves Berhad's debt levels at all concerning. 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, we've discovered 3 warning signs for Comfort Gloves Berhad (1 can't be ignored!) that you should be aware of before investing here.

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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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.