Does Karyon Industries Berhad (KLSE:KARYON) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Karyon Industries Berhad (KLSE:KARYON) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Karyon Industries Berhad

What Is Karyon Industries Berhad's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Karyon Industries Berhad had debt of RM9.84m, up from RM8.10m in one year. However, its balance sheet shows it holds RM28.5m in cash, so it actually has RM18.7m net cash.

A Look At Karyon Industries Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Karyon Industries Berhad had liabilities of RM24.1m due within 12 months and liabilities of RM9.08m due beyond that. On the other hand, it had cash of RM28.5m and RM42.8m worth of receivables due within a year. So it actually has RM38.1m more liquid assets than total liabilities.

This surplus strongly suggests that Karyon Industries Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Karyon Industries Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Karyon Industries Berhad grew its EBIT by 90% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Karyon Industries Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Karyon Industries 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. In the last three years, Karyon Industries Berhad's free cash flow amounted to 30% of its EBIT, less 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 Karyon Industries Berhad has RM18.7m in net cash and a decent-looking balance sheet. And we liked the look of last year's 90% year-on-year EBIT growth. So we don't think Karyon Industries 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. To that end, you should learn about the 4 warning signs we've spotted with Karyon Industries Berhad (including 2 which don't sit too well with us) .

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.