Does Bonia Corporation Berhad (KLSE:BONIA) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Bonia Corporation Berhad (KLSE:BONIA) does have debt on its balance sheet. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Bonia Corporation Berhad

What Is Bonia Corporation Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that Bonia Corporation Berhad had RM81.0m in debt in March 2022; about the same as the year before. However, it does have RM111.7m in cash offsetting this, leading to net cash of RM30.7m.

How Healthy Is Bonia Corporation Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bonia Corporation Berhad had liabilities of RM85.4m due within 12 months and liabilities of RM116.0m due beyond that. Offsetting these obligations, it had cash of RM111.7m as well as receivables valued at RM45.0m due within 12 months. So it has liabilities totalling RM44.7m more than its cash and near-term receivables, combined.

Given Bonia Corporation Berhad has a market capitalization of RM556.8m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

Better yet, Bonia Corporation Berhad grew its EBIT by 240% 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 future earnings, more than anything, that will determine Bonia Corporation Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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

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 RM30.7m. And it impressed us with free cash flow of RM85m, being 251% of its EBIT. So we don't think Bonia Corporation Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Bonia Corporation Berhad that you should be aware of before investing here.

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.