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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It is natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Like many other companies Berhad Comfort Gloves (KLSE: COMFORT) uses debt. But does this debt worry shareholders?
What risk does debt entail?
Debt helps a business until it struggles to pay it off, either with new capital or free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap stock price just to get its debt under control. Of course, many companies use debt to finance growth without any negative consequences. When we look at debt levels, we first look at cash and debt levels, together.
Consult our latest analyzes for Berhad comfort gloves
What is the debt of Comfort Gloves Berhad?
You can click on the graph below for historical figures, but it shows that Comfort Gloves Berhad had RM 53.9 million in debt in January 2021, up from RM 84.4 million a year earlier. However, he has 124.6 million RM in cash, resulting in net cash of 70.6 million RM.
A look at Berhad’s responsibilities in comfort gloves
According to the latest published balance sheet, Comfort Gloves Berhad had a liability of RM 153.8 million due within 12 months and a liability of RM 44.9 million beyond 12 months. In return for these obligations, he had cash of RM 124.6 million as well as receivables valued at RM 160.9 million and due within 12 months. So he can boast of having RM86.8 million more cash than total Liabilities.
This short-term liquidity is a sign that Comfort Gloves Berhad could likely repay its debt with ease, as its balance sheet is far from tight. In short, Comfort Gloves Berhad has a net cash flow, so it’s fair to say that it doesn’t have a heavy debt!
Best of all, Comfort Gloves Berhad increased its EBIT by 731% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in the years to come. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Comfort Gloves Berhad can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
Finally, while the tax authorities love accounting profits, lenders only accept cash. Although Comfort Gloves Berhad has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is. builds (or erodes) that cash balance. Over the past three years, Comfort Gloves Berhad recorded free cash flow of 22% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.
To summarize
While it’s always a good idea to investigate a company’s debt, in this case Comfort Gloves Berhad has RM70.6million in net cash and a decent looking balance sheet. And we liked the appearance of last year’s 731% year-over-year EBIT growth. So is Comfort Gloves Berhad’s debt a risk? It does not seem to us. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every company has them, and we’ve spotted 3 warning signs for Berhad comfort gloves (2 of which are potentially serious!) that you should know.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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