Does Oriental Holdings Berhad (KLSE:ORIENT) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Oriental Holdings Berhad (KLSE:ORIENT) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Oriental Holdings Berhad

What Is Oriental Holdings Berhad's Net Debt?

As you can see below, Oriental Holdings Berhad had RM1.70b of debt at June 2022, down from RM2.04b a year prior. However, it does have RM4.90b in cash offsetting this, leading to net cash of RM3.20b.

How Strong Is Oriental Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Oriental Holdings Berhad had liabilities of RM1.99b due within 12 months and liabilities of RM319.7m due beyond that. Offsetting this, it had RM4.90b in cash and RM408.2m in receivables that were due within 12 months. So it actually has RM2.99b more liquid assets than total liabilities.

This surplus strongly suggests that Oriental Holdings Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Oriental Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Oriental Holdings Berhad grew its EBIT by 119% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Oriental Holdings Berhad 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Oriental Holdings 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. Looking at the most recent three years, Oriental Holdings Berhad recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Oriental Holdings Berhad has net cash of RM3.20b, as well as more liquid assets than liabilities. And we liked the look of last year's 119% year-on-year EBIT growth. So we don't think Oriental Holdings Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Oriental Holdings Berhad (1 is significant!) 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.