These 4 Measures Indicate That Brem Holding Berhad (KLSE:BREM) Is Using Debt Reasonably Well

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.' 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. We note that Brem Holding Berhad (KLSE:BREM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Brem Holding Berhad

What Is Brem Holding Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Brem Holding Berhad had debt of RM89.9m at the end of September 2020, a reduction from RM100.3m over a year. However, its balance sheet shows it holds RM105.0m in cash, so it actually has RM15.1m net cash.

How Strong 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 RM94.6m due within 12 months and liabilities of RM46.4m due beyond that. On the other hand, it had cash of RM105.0m and RM31.4m worth of receivables due within a year. So it has liabilities totalling RM4.52m more than its cash and near-term receivables, combined.

This state of affairs indicates that Brem Holding Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the RM273.1m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Brem Holding Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Brem Holding Berhad's saving grace is its low debt levels, because its EBIT has tanked 29% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 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. Brem Holding 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. During the last two years, Brem Holding Berhad generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Brem Holding Berhad has RM15.1m in net cash. And it impressed us with free cash flow of RM11m, being 99% of its EBIT. So we don't have any problem with Brem Holding Berhad's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Brem Holding Berhad 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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