Bonia Corporation Berhad (KLSE:BONIA) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Bonia Corporation Berhad (KLSE:BONIA) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Bonia Corporation Berhad

What Is Bonia Corporation Berhad's Debt?

As you can see below, at the end of December 2020, Bonia Corporation Berhad had RM73.2m of debt, up from RM49.5m a year ago. Click the image for more detail. However, it does have RM117.8m in cash offsetting this, leading to net cash of RM44.7m.

How Healthy Is Bonia Corporation Berhad's Balance Sheet?

We can see from the most recent balance sheet that Bonia Corporation Berhad had liabilities of RM82.0m falling due within a year, and liabilities of RM123.7m due beyond that. Offsetting these obligations, it had cash of RM117.8m as well as receivables valued at RM61.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM26.7m.

Of course, Bonia Corporation Berhad has a market capitalization of RM185.9m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Bonia Corporation Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Bonia Corporation Berhad's EBIT was down 79% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Bonia Corporation 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. 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

Although Bonia Corporation Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM44.7m. And it impressed us with free cash flow of RM17m, being 173% of its EBIT. So we don't have any problem with Bonia Corporation Berhad's use of debt. 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. We've identified 5 warning signs with Bonia Corporation Berhad , and understanding them should be part of your investment process.

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. 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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