Is Kotra Industries Berhad (KLSE:KOTRA) A Risky Investment?

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. We note that Kotra Industries Berhad (KLSE:KOTRA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Kotra Industries Berhad

How Much Debt Does Kotra Industries Berhad Carry?

As you can see below, Kotra Industries Berhad had RM27.9m of debt at September 2020, down from RM41.0m a year prior. But it also has RM52.1m in cash to offset that, meaning it has RM24.2m net cash.

How Strong Is Kotra Industries Berhad's Balance Sheet?

We can see from the most recent balance sheet that Kotra Industries Berhad had liabilities of RM42.1m falling due within a year, and liabilities of RM16.5m due beyond that. Offsetting this, it had RM52.1m in cash and RM24.9m in receivables that were due within 12 months. So it can boast RM18.4m 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.

The good news is that Kotra Industries Berhad has increased its EBIT by 8.7% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kotra 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. Kotra 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. Happily for any shareholders, Kotra Industries Berhad actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Kotra Industries Berhad has net cash of RM24.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 157% of that EBIT to free cash flow, bringing in RM47m. So we don't think Kotra Industries Berhad's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Kotra Industries Berhad you should be aware of.

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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