Kanger International Berhad (KLSE:KANGER) Has Debt But No Earnings; Should You Worry?

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.' 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 Kanger International Berhad (KLSE:KANGER) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kanger International Berhad

How Much Debt Does Kanger International Berhad Carry?

The chart below, which you can click on for greater detail, shows that Kanger International Berhad had RM58.2m in debt in December 2020; about the same as the year before. However, it does have RM65.7m in cash offsetting this, leading to net cash of RM7.54m.

How Strong Is Kanger International Berhad's Balance Sheet?

According to the last reported balance sheet, Kanger International Berhad had liabilities of RM93.9m due within 12 months, and liabilities of RM24.2m due beyond 12 months. On the other hand, it had cash of RM65.7m and RM93.3m worth of receivables due within a year. So it actually has RM40.9m more liquid assets than total liabilities.

This surplus suggests that Kanger International Berhad is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Kanger International Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kanger International Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Kanger International Berhad had a loss before interest and tax, and actually shrunk its revenue by 50%, to RM33m. To be frank that doesn't bode well.

So How Risky Is Kanger International Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Kanger International Berhad had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of RM58m and booked a RM31m accounting loss. With only RM7.54m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that Kanger International Berhad is showing 4 warning signs in our investment analysis , and 2 of those are potentially serious...

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. 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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