Is Oriental Holdings Berhad (KLSE:ORIENT) A Risky Investment?

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.' 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. Importantly, Oriental Holdings Berhad (KLSE:ORIENT) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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 Oriental Holdings Berhad

What Is Oriental Holdings Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Oriental Holdings Berhad had RM3.00b of debt, an increase on RM1.83b, over one year. But it also has RM5.56b in cash to offset that, meaning it has RM2.56b net cash.

How Healthy Is Oriental Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Oriental Holdings Berhad had liabilities of RM2.66b falling due within a year, and liabilities of RM1.48b due beyond that. Offsetting this, it had RM5.56b in cash and RM952.3m in receivables that were due within 12 months. So it actually has RM2.37b more liquid assets than total liabilities.

This excess liquidity is a great indication that Oriental Holdings Berhad's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Oriental Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Oriental Holdings Berhad grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Oriental Holdings Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Oriental Holdings Berhad's free cash flow amounted to 20% of its EBIT, less 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 RM2.56b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 59% over the last year. So we don't think Oriental Holdings Berhad's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Oriental Holdings Berhad is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.