IRIS Corporation Berhad (KLSE:IRIS) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, IRIS Corporation Berhad (KLSE:IRIS) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for IRIS Corporation Berhad

What Is IRIS Corporation Berhad's Debt?

As you can see below, IRIS Corporation Berhad had RM21.8m of debt at December 2020, down from RM39.4m a year prior. However, it does have RM73.3m in cash offsetting this, leading to net cash of RM51.5m.

A Look At IRIS Corporation Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that IRIS Corporation Berhad had liabilities of RM153.8m due within 12 months and liabilities of RM16.6m due beyond that. Offsetting these obligations, it had cash of RM73.3m as well as receivables valued at RM94.6m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to IRIS Corporation Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the RM1.10b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, IRIS Corporation Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that IRIS Corporation Berhad's load is not too heavy, because its EBIT was down 87% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is IRIS Corporation 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Happily for any shareholders, IRIS Corporation Berhad actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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 RM51.5m. The cherry on top was that in converted 352% of that EBIT to free cash flow, bringing in RM6.5m. So we don't have any problem with IRIS Corporation Berhad's use of debt. 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. We've identified 2 warning signs with IRIS Corporation Berhad , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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