We Think KYM Holdings Bhd (KLSE:KYM) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies KYM Holdings Bhd (KLSE:KYM) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for KYM Holdings Bhd

What Is KYM Holdings Bhd's Net Debt?

As you can see below, at the end of October 2024, KYM Holdings Bhd had RM27.3m of debt, up from RM20.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM27.5m in cash, so it actually has RM213.0k net cash.

How Strong Is KYM Holdings Bhd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that KYM Holdings Bhd had liabilities of RM39.2m due within 12 months and liabilities of RM18.9m due beyond that. Offsetting this, it had RM27.5m in cash and RM24.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM6.16m.

Since publicly traded KYM Holdings Bhd shares are worth a total of RM50.4m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, KYM Holdings Bhd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, KYM Holdings Bhd made a loss at the EBIT level, last year, but improved that to positive EBIT of RM3.4m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since KYM Holdings Bhd 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. KYM Holdings Bhd 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. In the last year, KYM Holdings Bhd's free cash flow amounted to 37% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While KYM Holdings Bhd does have more liabilities than liquid assets, it also has net cash of RM213.0k. So we are not troubled with KYM Holdings Bhd's debt use. 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. Case in point: We've spotted 4 warning signs for KYM Holdings Bhd you should be aware of, and 1 of them is a bit unpleasant.

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. 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.