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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Kronologi Asia Berhad (KLSE:KRONO) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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

How Much Debt Does Kronologi Asia Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Kronologi Asia Berhad had RM32.6m of debt in April 2023, down from RM51.0m, one year before. However, its balance sheet shows it holds RM112.4m in cash, so it actually has RM79.8m net cash.

How Healthy Is Kronologi Asia Berhad's Balance Sheet?

We can see from the most recent balance sheet that Kronologi Asia Berhad had liabilities of RM93.6m falling due within a year, and liabilities of RM31.4m due beyond that. Offsetting these obligations, it had cash of RM112.4m as well as receivables valued at RM82.6m due within 12 months. So it can boast RM70.0m more liquid assets than total liabilities.

It's good to see that Kronologi Asia Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. 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.

And we also note warmly that Kronologi Asia Berhad grew its EBIT by 13% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Kronologi Asia Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Kronologi Asia Berhad recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Kronologi Asia Berhad has RM79.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM16m, being 81% of its EBIT. So we don't think Kronologi Asia Berhad's use of debt is risky. 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. Be aware that Kronologi Asia Berhad is showing 2 warning signs in our investment analysis , 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.

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

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.