Is Citaglobal Berhad (KLSE:CITAGLB) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Citaglobal Berhad (KLSE:CITAGLB) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Citaglobal Berhad

How Much Debt Does Citaglobal Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Citaglobal Berhad had RM58.7m of debt in December 2022, down from RM61.5m, one year before. But on the other hand it also has RM77.6m in cash, leading to a RM18.9m net cash position.

How Strong Is Citaglobal Berhad's Balance Sheet?

We can see from the most recent balance sheet that Citaglobal Berhad had liabilities of RM140.1m falling due within a year, and liabilities of RM20.8m due beyond that. Offsetting this, it had RM77.6m in cash and RM137.0m in receivables that were due within 12 months. So it can boast RM53.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Citaglobal Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Citaglobal Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Citaglobal 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.

Over 12 months, Citaglobal Berhad made a loss at the EBIT level, and saw its revenue drop to RM215m, which is a fall of 13%. That's not what we would hope to see.

So How Risky Is Citaglobal Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Citaglobal Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM6.0m and booked a RM41m accounting loss. Given it only has net cash of RM18.9m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Citaglobal Berhad (1 doesn't sit too well with us!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.