Here's Why Kronologi Asia Berhad (KLSE:KRONO) Can Manage Its Debt Responsibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Kronologi Asia Berhad (KLSE:KRONO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kronologi Asia Berhad

What Is Kronologi Asia Berhad's Debt?

As you can see below, Kronologi Asia Berhad had RM28.7m of debt at January 2021, down from RM30.6m a year prior. However, it does have RM69.6m in cash offsetting this, leading to net cash of RM40.9m.

A Look At Kronologi Asia Berhad's Liabilities

According to the last reported balance sheet, Kronologi Asia Berhad had liabilities of RM110.9m due within 12 months, and liabilities of RM17.4m due beyond 12 months. Offsetting these obligations, it had cash of RM69.6m as well as receivables valued at RM102.6m due within 12 months. So it can boast RM43.9m more liquid assets than total liabilities.

This surplus suggests that Kronologi Asia Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Kronologi Asia Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Kronologi Asia Berhad's load is not too heavy, because its EBIT was down 26% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Kronologi Asia Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Kronologi Asia 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. During the last three years, Kronologi Asia Berhad generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Kronologi Asia Berhad has RM40.9m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM19m, being 90% of its EBIT. So we don't have any problem with Kronologi Asia Berhad's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Kronologi Asia Berhad (of which 1 is a bit concerning!) you should know about.

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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