Industronics Berhad (KLSE:ITRONIC) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Industronics Berhad (KLSE:ITRONIC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Industronics Berhad

What Is Industronics Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Industronics Berhad had RM13.9m of debt, an increase on RM241.9k, over one year. But on the other hand it also has RM14.9m in cash, leading to a RM937.7k net cash position.

How Healthy Is Industronics Berhad's Balance Sheet?

We can see from the most recent balance sheet that Industronics Berhad had liabilities of RM26.0m falling due within a year, and liabilities of RM1.56m due beyond that. Offsetting this, it had RM14.9m in cash and RM5.41m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM7.29m.

Of course, Industronics Berhad has a market capitalization of RM43.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Industronics 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, Industronics Berhad turned things around in the last 12 months, delivering and EBIT of RM4.6m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Industronics 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. Industronics 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, Industronics Berhad saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While Industronics Berhad does have more liabilities than liquid assets, it also has net cash of RM937.7k. So we are not troubled with Industronics Berhad's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Industronics Berhad is showing 4 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

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.