Is Kossan Rubber Industries Bhd (KLSE:KOSSAN) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Kossan Rubber Industries Bhd (KLSE:KOSSAN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Kossan Rubber Industries Bhd

What Is Kossan Rubber Industries Bhd's Debt?

The image below, which you can click on for greater detail, shows that Kossan Rubber Industries Bhd had debt of RM30.8m at the end of June 2023, a reduction from RM194.7m over a year. But it also has RM2.03b in cash to offset that, meaning it has RM2.00b net cash.

How Healthy 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 RM212.1m due within 12 months and liabilities of RM144.2m due beyond that. Offsetting these obligations, it had cash of RM2.03b as well as receivables valued at RM462.2m due within 12 months. So it can boast RM2.14b more liquid assets than total liabilities.

This excess liquidity is a great indication that Kossan Rubber Industries Bhd's balance sheet is almost as strong as Fort Knox. 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! There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Kossan Rubber Industries Bhd made a loss at the EBIT level, and saw its revenue drop to RM1.9b, which is a fall of 47%. To be frank that doesn't bode well.

So How Risky Is Kossan Rubber Industries Bhd?

While Kossan Rubber Industries Bhd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM25m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. There's no doubt the next few years will be crucial to how the business matures. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Kossan Rubber Industries Bhd .

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.