Is KSL Holdings Berhad (KLSE:KSL) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, KSL Holdings Berhad (KLSE:KSL) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for KSL Holdings Berhad

What Is KSL Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that KSL Holdings Berhad had debt of RM103.4m at the end of September 2020, a reduction from RM110.4m over a year. But it also has RM311.8m in cash to offset that, meaning it has RM208.4m net cash.

How Healthy Is KSL Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, KSL Holdings Berhad had liabilities of RM149.7m due within 12 months, and liabilities of RM193.5m due beyond 12 months. On the other hand, it had cash of RM311.8m and RM125.4m worth of receivables due within a year. So it can boast RM93.9m more liquid assets than total liabilities.

This surplus suggests that KSL Holdings Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, KSL Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that KSL Holdings Berhad's load is not too heavy, because its EBIT was down 63% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is KSL Holdings Berhad'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.

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. Over the most recent three years, KSL Holdings Berhad recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case KSL Holdings Berhad has RM208.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 79% of that EBIT to free cash flow, bringing in RM49m. So we are not troubled with KSL Holdings Berhad's debt use. 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 KSL Holdings Berhad you should be aware of, and 1 of them makes us a bit uncomfortable.

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.

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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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