Is Kossan Rubber Industries Bhd (KLSE:KOSSAN) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Kossan Rubber Industries Bhd (KLSE:KOSSAN) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Kossan Rubber Industries Bhd

How Much Debt Does Kossan Rubber Industries Bhd Carry?

As you can see below, at the end of September 2024, Kossan Rubber Industries Bhd had RM70.4m of debt, up from RM19.2m a year ago. Click the image for more detail. But on the other hand it also has RM1.87b in cash, leading to a RM1.80b net cash position.

How Strong 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 RM287.5m falling due within a year, and liabilities of RM125.6m due beyond that. Offsetting this, it had RM1.87b in cash and RM534.7m in receivables that were due within 12 months. So it actually has RM1.99b more liquid assets than total liabilities.

This surplus liquidity suggests that Kossan Rubber Industries Bhd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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!

Even more impressive was the fact that Kossan Rubber Industries Bhd grew its EBIT by 4,520% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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. Looking at the most recent three years, Kossan Rubber Industries Bhd recorded free cash flow of 25% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

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 RM1.80b, as well as more liquid assets than liabilities. And we liked the look of last year's 4,520% year-on-year EBIT growth. So we don't think Kossan Rubber Industries Bhd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Kossan Rubber Industries Bhd has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.