Brem Holding Berhad (KLSE:BREM) Could Easily Take On More 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Brem Holding Berhad (KLSE:BREM) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, 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.

View our latest analysis for Brem Holding Berhad

What Is Brem Holding Berhad's Net Debt?

As you can see below, Brem Holding Berhad had RM85.1m of debt at September 2021, down from RM90.7m a year prior. But on the other hand it also has RM107.5m in cash, leading to a RM22.4m net cash position.

How Healthy Is Brem Holding Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Brem Holding Berhad had liabilities of RM87.2m due within 12 months and liabilities of RM39.4m due beyond that. On the other hand, it had cash of RM107.5m and RM32.8m worth of receivables due within a year. So it actually has RM13.7m more liquid assets than total liabilities.

This surplus suggests that Brem Holding Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Brem Holding Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Brem Holding Berhad has increased its EBIT by 2.7% over twelve months, which should ease any concerns about debt repayment. 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 Brem Holding 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 Brem Holding 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. Over the last three years, Brem Holding Berhad recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Brem Holding Berhad has net cash of RM22.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM15m, being 85% of its EBIT. So we don't think Brem Holding 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 Brem Holding Berhad is showing 2 warning signs in our investment analysis , you should know about...

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.