KSL Holdings Berhad (KLSE:KSL) Has A Rock Solid Balance Sheet

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.' 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 KSL Holdings Berhad (KLSE:KSL) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that KSL is potentially undervalued!

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 RM78.5m at the end of June 2022, a reduction from RM98.8m over a year. However, it does have RM240.9m in cash offsetting this, leading to net cash of RM162.4m.

How Strong Is KSL Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, KSL Holdings Berhad had liabilities of RM105.2m due within 12 months, and liabilities of RM133.4m due beyond 12 months. Offsetting these obligations, it had cash of RM240.9m as well as receivables valued at RM241.6m due within 12 months. So it actually has RM243.8m more liquid assets than total liabilities.

This luscious liquidity implies that KSL Holdings Berhad's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, KSL Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that KSL Holdings Berhad grew its EBIT by 13% last year, making its debt load easier to handle. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 35% 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 RM162.4m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 13% in the last twelve months. So is KSL Holdings Berhad's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for KSL Holdings 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. 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.