We Think Kronologi Asia Berhad (KLSE:KRONO) Can Manage Its Debt With Ease

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.' 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. We note that Kronologi Asia Berhad (KLSE:KRONO) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Kronologi Asia Berhad

How Much Debt Does Kronologi Asia Berhad Carry?

As you can see below, at the end of April 2022, Kronologi Asia Berhad had RM51.0m of debt, up from RM28.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM119.7m in cash, so it actually has RM68.7m net cash.

A Look At Kronologi Asia Berhad's Liabilities

We can see from the most recent balance sheet that Kronologi Asia Berhad had liabilities of RM141.5m falling due within a year, and liabilities of RM24.6m due beyond that. Offsetting this, it had RM119.7m in cash and RM72.8m in receivables that were due within 12 months. So it can boast RM26.4m 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. Succinctly put, Kronologi Asia Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Kronologi Asia Berhad has boosted its EBIT by 61%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Kronologi Asia Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Over the last three years, Kronologi Asia Berhad actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Kronologi Asia Berhad has RM68.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM23m, being 108% of its EBIT. So we don't think Kronologi Asia Berhad's use of debt is risky. 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. Be aware that Kronologi Asia Berhad is showing 3 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.

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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.