Does Kossan Rubber Industries Bhd (KLSE:KOSSAN) 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 Kossan Rubber Industries Bhd (KLSE:KOSSAN) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Kossan Rubber Industries Bhd

How Much Debt Does Kossan Rubber Industries Bhd Carry?

As you can see below, Kossan Rubber Industries Bhd had RM554.7m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has RM1.09b in cash, leading to a RM534.4m net cash position.

A Look At Kossan Rubber Industries Bhd's Liabilities

According to the last reported balance sheet, Kossan Rubber Industries Bhd had liabilities of RM916.6m due within 12 months, and liabilities of RM243.6m due beyond 12 months. Offsetting these obligations, it had cash of RM1.09b as well as receivables valued at RM629.6m due within 12 months. So it actually has RM558.5m more liquid assets than total liabilities.

This surplus suggests that Kossan Rubber Industries Bhd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Kossan Rubber Industries Bhd boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Kossan Rubber Industries Bhd grew its EBIT by 388% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kossan Rubber Industries Bhd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kossan Rubber Industries Bhd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Kossan Rubber Industries Bhd's free cash flow amounted to 44% of its EBIT, less 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 Kossan Rubber Industries Bhd has RM534.4m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 388% over the last year. So we don't think Kossan Rubber Industries Bhd's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Kossan Rubber Industries Bhd you should be aware of, and 1 of them is a bit concerning.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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