Stock Analysis

Here's Why CB Industrial Product Holding Berhad (KLSE:CBIP) Can Manage Its Debt Responsibly

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KLSE:CBIP
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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. As with many other companies CB Industrial Product Holding Berhad (KLSE:CBIP) makes use of debt. But is this debt a concern to shareholders?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for CB Industrial Product Holding Berhad

How Much Debt Does CB Industrial Product Holding Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 CB Industrial Product Holding Berhad had RM224.8m of debt, an increase on RM169.5m, over one year. On the flip side, it has RM85.0m in cash leading to net debt of about RM139.8m.

debt-equity-history-analysis
KLSE:CBIP Debt to Equity History September 29th 2022

How Healthy Is CB Industrial Product Holding Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CB Industrial Product Holding Berhad had liabilities of RM216.4m due within 12 months and liabilities of RM166.8m due beyond that. On the other hand, it had cash of RM85.0m and RM310.1m worth of receivables due within a year. So it can boast RM11.9m more liquid assets than total liabilities.

This surplus suggests that CB Industrial Product Holding Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

We'd say that CB Industrial Product Holding Berhad's moderate net debt to EBITDA ratio ( being 1.6), indicates prudence when it comes to debt. And its commanding EBIT of 1k times its interest expense, implies the debt load is as light as a peacock feather. On top of that, CB Industrial Product Holding Berhad grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if CB Industrial Product Holding Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, CB Industrial Product Holding Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

The good news is that CB Industrial Product Holding Berhad's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But the stark truth is that we are concerned by its conversion of EBIT to free cash flow. Looking at all the aforementioned factors together, it strikes us that CB Industrial Product Holding Berhad can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for CB Industrial Product Holding Berhad (1 shouldn't be ignored) you should be aware of.

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.

Valuation is complex, but we're helping make it simple.

Find out whether CB Industrial Product Holding Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About KLSE:CBIP

CB Industrial Product Holding Berhad

CB Industrial Product Holding Berhad, an investment holding company, manufactures and sells palm oil mill equipment and related spare parts in Indonesia, Malaysia, Papua New Guinea, Central America, Africa, Liberia, and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation3
Future Growth3
Past Performance2
Financial Health4
Dividends2

Read more about these checks in the individual report sections or in our analysis model.

Adequate balance sheet and fair value.