We Think Comfort Gloves Berhad (KLSE:COMFORT) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Comfort Gloves Berhad (KLSE:COMFORT) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Comfort Gloves Berhad

How Much Debt Does Comfort Gloves Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Comfort Gloves Berhad had RM53.9m of debt in January 2021, down from RM84.4m, one year before. However, it does have RM124.6m in cash offsetting this, leading to net cash of RM70.6m.

A Look At Comfort Gloves Berhad's Liabilities

According to the last reported balance sheet, Comfort Gloves Berhad had liabilities of RM153.8m due within 12 months, and liabilities of RM44.9m due beyond 12 months. Offsetting these obligations, it had cash of RM124.6m as well as receivables valued at RM160.9m due within 12 months. So it can boast RM86.8m 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!

Better yet, Comfort Gloves Berhad grew its EBIT by 731% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Comfort Gloves Berhad 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. 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 22% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Comfort Gloves Berhad has RM70.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 731% year-on-year EBIT growth. So is Comfort Gloves Berhad's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Comfort Gloves Berhad (of which 2 are potentially serious!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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