Is Comfort Gloves Berhad (KLSE:COMFORT) Using Debt Sensibly?

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.' 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 note that Comfort Gloves Berhad (KLSE:COMFORT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Comfort Gloves Berhad

What Is Comfort Gloves Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Comfort Gloves Berhad had RM36.8m of debt in December 2022, down from RM93.8m, one year before. However, its balance sheet shows it holds RM247.2m in cash, so it actually has RM210.4m net cash.

How Strong Is Comfort Gloves Berhad's Balance Sheet?

The latest balance sheet data shows that Comfort Gloves Berhad had liabilities of RM83.7m due within a year, and liabilities of RM13.9m falling due after that. Offsetting these obligations, it had cash of RM247.2m as well as receivables valued at RM158.5m due within 12 months. So it actually has RM308.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Comfort Gloves Berhad's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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 it is Comfort Gloves 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.

Over 12 months, Comfort Gloves Berhad made a loss at the EBIT level, and saw its revenue drop to RM607m, which is a fall of 60%. To be frank that doesn't bode well.

So How Risky Is Comfort Gloves Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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 RM1.9m of cash and made a loss of RM42m. With only RM210.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Comfort Gloves Berhad that 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.