Health Check: How Prudently Does Key Alliance Group Berhad (KLSE:KGROUP) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Key Alliance Group Berhad (KLSE:KGROUP) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Key Alliance Group Berhad

What Is Key Alliance Group Berhad's Debt?

As you can see below, Key Alliance Group Berhad had RM11.1m of debt at December 2020, down from RM11.7m a year prior. But it also has RM53.0m in cash to offset that, meaning it has RM41.9m net cash.

A Look At Key Alliance Group Berhad's Liabilities

According to the last reported balance sheet, Key Alliance Group Berhad had liabilities of RM64.7m due within 12 months, and liabilities of RM13.2m due beyond 12 months. Offsetting these obligations, it had cash of RM53.0m as well as receivables valued at RM58.2m due within 12 months. So it actually has RM33.4m more liquid assets than total liabilities.

It's good to see that Key Alliance Group Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Key Alliance Group Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Key Alliance Group Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Key Alliance Group Berhad reported revenue of RM50m, which is a gain of 26%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Key Alliance Group Berhad?

While Key Alliance Group Berhad lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of RM22m. 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. Keeping in mind its 26% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. 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. We've identified 3 warning signs with Key Alliance Group Berhad (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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