Is Kossan Rubber Industries Bhd (KLSE:KOSSAN) A Risky Investment?

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 can see that Kossan Rubber Industries Bhd (KLSE:KOSSAN) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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.

Check out our latest analysis for Kossan Rubber Industries Bhd

What Is Kossan Rubber Industries Bhd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Kossan Rubber Industries Bhd had RM17.0m of debt in June 2024, down from RM30.8m, one year before. But it also has RM2.07b in cash to offset that, meaning it has RM2.05b net cash.

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

We can see from the most recent balance sheet that Kossan Rubber Industries Bhd had liabilities of RM233.2m falling due within a year, and liabilities of RM123.9m due beyond that. Offsetting these obligations, it had cash of RM2.07b as well as receivables valued at RM516.0m due within 12 months. So it can boast RM2.23b 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). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Kossan Rubber Industries Bhd boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Kossan Rubber Industries Bhd made a loss at the EBIT level, last year, it was also good to see that it generated RM124m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 year, Kossan Rubber Industries Bhd recorded free cash flow worth 56% 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 it is always sensible to investigate a company's debt, in this case Kossan Rubber Industries Bhd has RM2.05b in net cash and a decent-looking balance sheet. 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. Case in point: We've spotted 2 warning signs for Kossan Rubber Industries Bhd you should be aware of.

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.