Bonia Corporation Berhad (KLSE:BONIA) Has A Rock Solid Balance Sheet

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.' 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, Bonia Corporation Berhad (KLSE:BONIA) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. 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.

Check out our latest analysis for Bonia Corporation Berhad

What Is Bonia Corporation Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Bonia Corporation Berhad had RM80.4m in debt in June 2022; about the same as the year before. However, it does have RM142.6m in cash offsetting this, leading to net cash of RM62.2m.

A Look At Bonia Corporation Berhad's Liabilities

We can see from the most recent balance sheet that Bonia Corporation Berhad had liabilities of RM94.0m falling due within a year, and liabilities of RM127.9m due beyond that. On the other hand, it had cash of RM142.6m and RM51.5m worth of receivables due within a year. So it has liabilities totalling RM27.9m more than its cash and near-term receivables, combined.

Since publicly traded Bonia Corporation Berhad shares are worth a total of RM442.2m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Bonia Corporation Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Bonia Corporation Berhad grew its EBIT by 242% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Bonia Corporation Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Bonia Corporation 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, Bonia Corporation 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

We could understand if investors are concerned about Bonia Corporation Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM62.2m. The cherry on top was that in converted 231% of that EBIT to free cash flow, bringing in RM90m. So is Bonia Corporation 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. For example Bonia Corporation Berhad has 4 warning signs (and 1 which is potentially serious) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.