Is Koda (SGX:BJZ) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Koda Ltd (SGX:BJZ) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Koda

What Is Koda's Debt?

The image below, which you can click on for greater detail, shows that Koda had debt of US$11.5m at the end of June 2023, a reduction from US$14.4m over a year. But it also has US$15.3m in cash to offset that, meaning it has US$3.79m net cash.

A Look At Koda's Liabilities

According to the last reported balance sheet, Koda had liabilities of US$12.1m due within 12 months, and liabilities of US$13.2m due beyond 12 months. On the other hand, it had cash of US$15.3m and US$6.44m worth of receivables due within a year. So it has liabilities totalling US$3.54m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Koda is worth US$13.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 you can't view debt in total isolation; since Koda will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Koda made a loss at the EBIT level, and saw its revenue drop to US$44m, which is a fall of 45%. That makes us nervous, to say the least.

So How Risky Is Koda?

Although Koda had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$6.3m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For example, we've discovered 3 warning signs for Koda (2 are a bit concerning!) that you should be aware of before investing here.

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.