KSL Holdings Berhad (KLSE:KSL) Seems To Use Debt Rather Sparingly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that KSL Holdings Berhad (KLSE:KSL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for KSL Holdings Berhad

How Much Debt Does KSL Holdings Berhad Carry?

The image below, which you can click on for greater detail, shows that KSL Holdings Berhad had debt of RM58.2m at the end of June 2023, a reduction from RM78.5m over a year. However, it does have RM423.8m in cash offsetting this, leading to net cash of RM365.7m.

A Look At KSL Holdings Berhad's Liabilities

According to the last reported balance sheet, KSL Holdings Berhad had liabilities of RM181.6m due within 12 months, and liabilities of RM127.0m due beyond 12 months. Offsetting this, it had RM423.8m in cash and RM360.7m in receivables that were due within 12 months. So it can boast RM476.0m more liquid assets than total liabilities.

This surplus liquidity suggests that KSL Holdings Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, KSL Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, KSL Holdings Berhad grew its EBIT by 124% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is KSL Holdings 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While KSL Holdings 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. Looking at the most recent three years, KSL Holdings Berhad recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that KSL Holdings Berhad has net cash of RM365.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 124% year-on-year EBIT growth. So is KSL Holdings Berhad's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with KSL Holdings Berhad (including 1 which is significant) .

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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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.