Is Cabnet Holdings Berhad (KLSE:CABNET) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Cabnet Holdings Berhad (KLSE:CABNET) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Cabnet Holdings Berhad

What Is Cabnet Holdings Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Cabnet Holdings Berhad had RM14.4m in debt in February 2024; about the same as the year before. But it also has RM18.9m in cash to offset that, meaning it has RM4.47m net cash.

A Look At Cabnet Holdings Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Cabnet Holdings Berhad had liabilities of RM80.8m due within 12 months and liabilities of RM4.46m due beyond that. On the other hand, it had cash of RM18.9m and RM83.1m worth of receivables due within a year. So it actually has RM16.8m more liquid assets than total liabilities.

It's good to see that Cabnet Holdings Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Cabnet Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Cabnet Holdings Berhad's EBIT launched higher than Elon Musk, gaining a whopping 404% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But it is Cabnet Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. 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, a company can only pay off debt with cold hard cash, not accounting profits. While Cabnet 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. Over the last three years, Cabnet Holdings Berhad actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Cabnet Holdings Berhad has net cash of RM4.47m, as well as more liquid assets than liabilities. The cherry on top was that in converted 124% of that EBIT to free cash flow, bringing in RM6.8m. So is Cabnet Holdings Berhad's debt a risk? It doesn't seem so to us. 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. For example Cabnet Holdings Berhad has 3 warning signs (and 2 which are potentially serious) we think you should know about.

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.

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