KYM Holdings Bhd (KLSE:KYM) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, '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 KYM Holdings Bhd (KLSE:KYM) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for KYM Holdings Bhd

What Is KYM Holdings Bhd's Net Debt?

The image below, which you can click on for greater detail, shows that KYM Holdings Bhd had debt of RM18.6m at the end of April 2024, a reduction from RM26.4m over a year. However, it does have RM26.0m in cash offsetting this, leading to net cash of RM7.38m.

How Strong Is KYM Holdings Bhd's Balance Sheet?

The latest balance sheet data shows that KYM Holdings Bhd had liabilities of RM33.1m due within a year, and liabilities of RM19.6m falling due after that. Offsetting this, it had RM26.0m in cash and RM29.5m in receivables that were due within 12 months. So it actually has RM2.79m more liquid assets than total liabilities.

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

Shareholders should be aware that KYM Holdings Bhd's EBIT was down 76% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is KYM Holdings Bhd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While KYM Holdings Bhd 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. Over the last three years, KYM Holdings Bhd recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that KYM Holdings Bhd has net cash of RM7.38m, as well as more liquid assets than liabilities. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in RM14m. So we don't have any problem with KYM Holdings Bhd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - KYM Holdings Bhd has 3 warning signs we think you should be aware of.

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.

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

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.

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