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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Koda Ltd (SGX:BJZ) does use debt in its business. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Koda
What Is Koda's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Koda had US$397.0k of debt in June 2019, down from US$713.0k, one year before. But it also has US$13.4m in cash to offset that, meaning it has US$13.0m net cash.
How Healthy Is Koda's Balance Sheet?
The latest balance sheet data shows that Koda had liabilities of US$7.80m due within a year, and liabilities of US$449.0k falling due after that. Offsetting these obligations, it had cash of US$13.4m as well as receivables valued at US$6.08m due within 12 months. So it actually has US$11.2m more liquid assets than total liabilities.
This surplus liquidity suggests that Koda's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Koda boasts net cash, so it's fair to say it does not have a heavy debt load!
But the bad news is that Koda has seen its EBIT plunge 16% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Koda 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. During the last three years, Koda produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.