Kronologi Asia Berhad (KLSE:KRONO) Seems To Use Debt Rather Sparingly

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.' 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, Kronologi Asia Berhad (KLSE:KRONO) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

Check out our latest analysis for Kronologi Asia Berhad

What Is Kronologi Asia Berhad's Debt?

As you can see below, at the end of October 2022, Kronologi Asia Berhad had RM32.8m of debt, up from RM28.4m a year ago. Click the image for more detail. But on the other hand it also has RM116.6m in cash, leading to a RM83.8m net cash position.

How Healthy Is Kronologi Asia Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kronologi Asia Berhad had liabilities of RM135.4m due within 12 months and liabilities of RM32.9m due beyond that. Offsetting these obligations, it had cash of RM116.6m as well as receivables valued at RM107.8m due within 12 months. So it can boast RM56.0m more liquid assets than total liabilities.

This excess liquidity suggests that Kronologi Asia Berhad is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Kronologi Asia Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Kronologi Asia Berhad saw its EBIT drop by 6.4% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its 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 Kronologi Asia Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, Kronologi Asia Berhad actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kronologi Asia Berhad has net cash of RM83.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 148% of that EBIT to free cash flow, bringing in RM13m. So is Kronologi Asia Berhad's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Kronologi Asia Berhad , and understanding them should be part of your investment process.

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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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.