Is Koda (SGX:BJZ) Using Debt 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.' 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 can see that Koda Ltd (SGX:BJZ) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Koda

What Is Koda's Net Debt?

The image below, which you can click on for greater detail, shows that Koda had debt of US$11.3m at the end of December 2023, a reduction from US$12.6m over a year. But on the other hand it also has US$13.4m in cash, leading to a US$2.15m net cash position.

A Look At Koda's Liabilities

Zooming in on the latest balance sheet data, we can see that Koda had liabilities of US$12.3m due within 12 months and liabilities of US$13.6m due beyond that. Offsetting these obligations, it had cash of US$13.4m as well as receivables valued at US$7.27m due within 12 months. So it has liabilities totalling US$5.25m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Koda has a market capitalization of US$14.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Koda boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Koda's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Koda had a loss before interest and tax, and actually shrunk its revenue by 45%, to US$39m. That makes us nervous, to say the least.

So How Risky Is Koda?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Koda lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$210k of cash and made a loss of US$5.5m. With only US$2.15m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example Koda has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.