KESM Industries Berhad (KLSE:KESM) Has Debt But No Earnings; Should You Worry?

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.' 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. Importantly, KESM Industries Berhad (KLSE:KESM) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for KESM Industries Berhad

How Much Debt Does KESM Industries Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that KESM Industries Berhad had RM10.0m of debt in January 2021, down from RM34.8m, one year before. However, its balance sheet shows it holds RM225.9m in cash, so it actually has RM215.9m net cash.

How Strong Is KESM Industries Berhad's Balance Sheet?

According to the last reported balance sheet, KESM Industries Berhad had liabilities of RM49.7m due within 12 months, and liabilities of RM11.9m due beyond 12 months. Offsetting this, it had RM225.9m in cash and RM59.9m in receivables that were due within 12 months. So it can boast RM224.2m more liquid assets than total liabilities.

This luscious liquidity implies that KESM Industries Berhad's balance sheet is sturdy like a giant sequoia tree. 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! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if KESM Industries Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year KESM Industries Berhad had a loss before interest and tax, and actually shrunk its revenue by 18%, to RM237m. We would much prefer see growth.

So How Risky Is KESM Industries Berhad?

Although KESM Industries Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of RM797k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - KESM Industries Berhad has 3 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you're looking for stocks to buy, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.