Does Kotra Industries Berhad (KLSE:KOTRA) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Kotra Industries Berhad (KLSE:KOTRA) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kotra Industries Berhad

What Is Kotra Industries Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Kotra Industries Berhad had RM24.6m of debt in December 2020, down from RM37.7m, one year before. However, its balance sheet shows it holds RM44.7m in cash, so it actually has RM20.2m net cash.

How Healthy Is Kotra Industries Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kotra Industries Berhad had liabilities of RM36.8m due within 12 months and liabilities of RM13.7m due beyond that. On the other hand, it had cash of RM44.7m and RM27.9m worth of receivables due within a year. So it actually has RM22.2m more liquid assets than total liabilities.

This surplus suggests that Kotra Industries Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Kotra Industries Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Kotra Industries Berhad's saving grace is its low debt levels, because its EBIT has tanked 33% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Kotra 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 Kotra 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. Over the last three years, Kotra Industries Berhad actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Kotra Industries Berhad has RM20.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 159% of that EBIT to free cash flow, bringing in RM42m. So we are not troubled with Kotra Industries Berhad'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. To that end, you should be aware of the 2 warning signs we've spotted with Kotra Industries Berhad .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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