Is Karyon Industries Berhad (KLSE:KARYON) 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.' 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. Importantly, Karyon Industries Berhad (KLSE:KARYON) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Karyon Industries Berhad

What Is Karyon Industries Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Karyon Industries Berhad had RM8.37m of debt, an increase on RM7.92m, over one year. But it also has RM33.7m in cash to offset that, meaning it has RM25.3m net cash.

How Healthy Is Karyon Industries Berhad's Balance Sheet?

We can see from the most recent balance sheet that Karyon Industries Berhad had liabilities of RM17.7m falling due within a year, and liabilities of RM9.40m due beyond that. Offsetting this, it had RM33.7m in cash and RM33.0m in receivables that were due within 12 months. So it can boast RM39.6m 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). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Karyon Industries Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Karyon Industries Berhad's load is not too heavy, because its EBIT was down 37% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Karyon Industries Berhad will need earnings to service that debt. 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. Karyon Industries Berhad 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. During the last three years, Karyon Industries Berhad produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Karyon Industries Berhad has RM25.3m in net cash and a decent-looking balance sheet. So we are not troubled with Karyon Industries Berhad's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Karyon Industries Berhad has 4 warning signs (and 1 which is concerning) we think you should know about.

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. 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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