These 4 Measures Indicate That Cabnet Holdings Berhad (KLSE:CABNET) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Cabnet Holdings Berhad (KLSE:CABNET) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Cabnet Holdings Berhad

How Much Debt Does Cabnet Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of August 2024 Cabnet Holdings Berhad had RM15.1m of debt, an increase on RM14.4m, over one year. However, its balance sheet shows it holds RM19.8m in cash, so it actually has RM4.76m net cash.

How Strong Is Cabnet Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cabnet Holdings Berhad had liabilities of RM73.6m due within 12 months and liabilities of RM3.94m due beyond that. On the other hand, it had cash of RM19.8m and RM74.5m worth of receivables due within a year. So it can boast RM16.8m more liquid assets than total liabilities.

This excess liquidity suggests that Cabnet Holdings Berhad is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Cabnet Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Cabnet Holdings Berhad grew its EBIT by 77% 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 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, Cabnet Holdings Berhad actually produced more free cash flow than EBIT over the last three years. 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 RM4.76m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM4.0m, being 102% of its EBIT. So is Cabnet Holdings Berhad's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for Cabnet Holdings Berhad you should be aware of, and 1 of them is significant.

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.