We Think Bonia Corporation Berhad (KLSE:BONIA) Can Stay On Top Of Its Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Bonia Corporation Berhad (KLSE:BONIA) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Bonia Corporation Berhad

What Is Bonia Corporation Berhad's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Bonia Corporation Berhad had debt of RM82.9m, up from RM39.7m in one year. However, it does have RM103.2m in cash offsetting this, leading to net cash of RM20.3m.

How Strong Is Bonia Corporation Berhad's Balance Sheet?

We can see from the most recent balance sheet that Bonia Corporation Berhad had liabilities of RM78.4m falling due within a year, and liabilities of RM112.1m due beyond that. Offsetting this, it had RM103.2m in cash and RM39.6m in receivables that were due within 12 months. So its liabilities total RM47.7m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Bonia Corporation Berhad is worth RM221.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Bonia Corporation Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Bonia Corporation Berhad's EBIT fell a jaw-dropping 40% in the last twelve months. 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 ultimately the future profitability of the business will decide if Bonia Corporation Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Bonia Corporation Berhad actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Bonia Corporation Berhad does have more liabilities than liquid assets, it also has net cash of RM20.3m. And it impressed us with free cash flow of RM68m, being 263% of its EBIT. So we don't have any problem with Bonia Corporation Berhad's use of debt. 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 5 warning signs for Bonia Corporation Berhad you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.