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.' 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. We can see that Comfort Gloves Berhad (KLSE:COMFORT) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Comfort Gloves Berhad

What Is Comfort Gloves Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Comfort Gloves Berhad had debt of RM54.5m at the end of June 2023, a reduction from RM90.8m over a year. But on the other hand it also has RM251.8m in cash, leading to a RM197.3m net cash position.

How Strong Is Comfort Gloves Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Comfort Gloves Berhad had liabilities of RM93.8m due within 12 months and liabilities of RM10.3m due beyond that. On the other hand, it had cash of RM251.8m and RM166.0m worth of receivables due within a year. So it actually has RM313.7m more liquid assets than total liabilities.

This surplus strongly suggests that Comfort Gloves Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Comfort Gloves Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Comfort Gloves Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Comfort Gloves Berhad made a loss at the EBIT level, and saw its revenue drop to RM410m, which is a fall of 61%. To be frank that doesn't bode well.

So How Risky Is Comfort Gloves Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Comfort Gloves Berhad had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through RM25m of cash and made a loss of RM69m. With only RM197.3m 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. Case in point: We've spotted 1 warning sign for Comfort Gloves Berhad you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.