Does Kossan Rubber Industries Bhd (KLSE:KOSSAN) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Kossan Rubber Industries Bhd (KLSE:KOSSAN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kossan Rubber Industries Bhd

What Is Kossan Rubber Industries Bhd's Debt?

You can click the graphic below for the historical numbers, but it shows that Kossan Rubber Industries Bhd had RM194.7m of debt in June 2022, down from RM349.2m, one year before. But it also has RM2.23b in cash to offset that, meaning it has RM2.03b net cash.

How Strong Is Kossan Rubber Industries Bhd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kossan Rubber Industries Bhd had liabilities of RM442.5m due within 12 months and liabilities of RM171.0m due beyond that. On the other hand, it had cash of RM2.23b and RM416.1m worth of receivables due within a year. So it can boast RM2.03b more liquid assets than total liabilities.

This surplus strongly suggests that Kossan Rubber Industries Bhd has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Kossan Rubber Industries Bhd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Kossan Rubber Industries Bhd's load is not too heavy, because its EBIT was down 72% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Kossan Rubber Industries Bhd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the most recent three years, Kossan Rubber Industries Bhd recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kossan Rubber Industries Bhd has net cash of RM2.03b, as well as more liquid assets than liabilities. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in RM1.3b. So is Kossan Rubber Industries Bhd's debt a risk? It doesn't seem so to us. 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. For example Kossan Rubber Industries Bhd has 3 warning signs (and 1 which is potentially serious) we think you should know about.

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. 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.