IRIS Corporation Berhad (KLSE:IRIS) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies IRIS Corporation Berhad (KLSE:IRIS) makes use of 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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 RM7.50m at the end of March 2022, a reduction from RM18.8m over a year. However, it does have RM80.1m in cash offsetting this, leading to net cash of RM72.6m.

A Look At IRIS Corporation Berhad's Liabilities

The latest balance sheet data shows that IRIS Corporation Berhad had liabilities of RM170.1m due within a year, and liabilities of RM15.4m falling due after that. Offsetting these obligations, it had cash of RM80.1m as well as receivables valued at RM151.6m due within 12 months. So it actually has RM46.2m more liquid assets than total liabilities.

This surplus suggests that IRIS Corporation Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, IRIS Corporation Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Although IRIS Corporation Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM119k in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While IRIS Corporation 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. During the last year, IRIS Corporation Berhad burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that IRIS Corporation Berhad has net cash of RM72.6m, as well as more liquid assets than liabilities. 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. For example - IRIS Corporation Berhad has 2 warning signs we think you should be aware of.

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. 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.