Is Comfort Gloves Berhad (KLSE:COMFORT) A Risky Investment?

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.' 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. As with many other companies Comfort Gloves Berhad (KLSE:COMFORT) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Comfort Gloves Berhad

What Is Comfort Gloves Berhad's Net Debt?

As you can see below, Comfort Gloves Berhad had RM79.7m of debt at October 2020, down from RM92.1m a year prior. However, its balance sheet shows it holds RM138.0m in cash, so it actually has RM58.3m net cash.

How Healthy Is Comfort Gloves Berhad's Balance Sheet?

The latest balance sheet data shows that Comfort Gloves Berhad had liabilities of RM165.5m due within a year, and liabilities of RM52.6m falling due after that. Offsetting these obligations, it had cash of RM138.0m as well as receivables valued at RM143.2m due within 12 months. So it actually has RM63.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Comfort Gloves Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Comfort Gloves Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Comfort Gloves Berhad grew its EBIT by 407% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Comfort Gloves Berhad'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Comfort Gloves Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Comfort Gloves Berhad recorded free cash flow of 31% 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 Comfort Gloves Berhad has net cash of RM58.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 407% year-on-year EBIT growth. So we don't think Comfort Gloves Berhad's use of debt is risky. 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, we've discovered 1 warning sign for Comfort Gloves Berhad that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you decide to trade Comfort Gloves Berhad, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.