Here's Why KESM Industries Berhad (KLSE:KESM) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, KESM Industries Berhad (KLSE:KESM) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for KESM Industries Berhad

What Is KESM Industries Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that KESM Industries Berhad had RM7.17m of debt in October 2021, down from RM10.8m, one year before. But on the other hand it also has RM224.4m in cash, leading to a RM217.2m net cash position.

How Strong Is KESM Industries Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that KESM Industries Berhad had liabilities of RM37.2m due within 12 months and liabilities of RM12.1m due beyond that. Offsetting this, it had RM224.4m in cash and RM60.4m in receivables that were due within 12 months. So it can boast RM235.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that KESM Industries Berhad's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, KESM Industries Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Although KESM Industries Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM9.6m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine KESM Industries 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. KESM Industries 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. During the last year, KESM Industries Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that KESM Industries Berhad has net cash of RM217.2m, as well as more liquid assets than liabilities. So we are not troubled with KESM Industries Berhad's debt use. 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 2 warning signs for KESM Industries Berhad that you should be aware of before investing here.

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.