Does IRIS Corporation Berhad (KLSE:IRIS) Have A Healthy Balance Sheet?

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. Importantly, IRIS Corporation Berhad (KLSE:IRIS) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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 IRIS Corporation Berhad

What Is IRIS Corporation Berhad's Debt?

The image below, which you can click on for greater detail, shows that IRIS Corporation Berhad had debt of RM24.9m at the end of September 2020, a reduction from RM47.5m over a year. But on the other hand it also has RM44.2m in cash, leading to a RM19.2m net cash position.

A Look At IRIS Corporation Berhad's Liabilities

We can see from the most recent balance sheet that IRIS Corporation Berhad had liabilities of RM186.5m falling due within a year, and liabilities of RM21.1m due beyond that. Offsetting these obligations, it had cash of RM44.2m as well as receivables valued at RM142.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM21.5m.

Given IRIS Corporation Berhad has a market capitalization of RM1.07b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, IRIS Corporation Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, IRIS Corporation Berhad turned things around in the last 12 months, delivering and EBIT of RM2.6m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since IRIS Corporation Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. IRIS Corporation 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 year, IRIS Corporation Berhad actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about IRIS Corporation Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM19.2m. The cherry on top was that in converted 211% of that EBIT to free cash flow, bringing in RM5.5m. So is IRIS Corporation Berhad's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with IRIS Corporation 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. 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.
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