Kronologi Asia Berhad (KLSE:KRONO) Seems To Use Debt Quite Sensibly

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.' 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 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Kronologi Asia Berhad

What Is Kronologi Asia Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Kronologi Asia Berhad had RM7.58m of debt in April 2024, down from RM32.6m, one year before. However, it does have RM71.5m in cash offsetting this, leading to net cash of RM63.9m.

A Look At Kronologi Asia Berhad's Liabilities

According to the last reported balance sheet, Kronologi Asia Berhad had liabilities of RM86.4m due within 12 months, and liabilities of RM54.3m due beyond 12 months. Offsetting this, it had RM71.5m in cash and RM101.6m in receivables that were due within 12 months. So it can boast RM32.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Kronologi Asia Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

Shareholders should be aware that Kronologi Asia Berhad's EBIT was down 65% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kronologi Asia 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. Looking at the most recent three years, Kronologi Asia Berhad recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kronologi Asia Berhad has net cash of RM63.9m, as well as more liquid assets than liabilities. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Kronologi Asia Berhad has 2 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.

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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.

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