Is Ramssol Group Berhad (KLSE:RAMSSOL) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Ramssol Group Berhad (KLSE:RAMSSOL) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for Ramssol Group Berhad

How Much Debt Does Ramssol Group Berhad Carry?

As you can see below, at the end of September 2023, Ramssol Group Berhad had RM14.7m of debt, up from RM11.3m a year ago. Click the image for more detail. However, it does have RM26.2m in cash offsetting this, leading to net cash of RM11.6m.

How Strong Is Ramssol Group Berhad's Balance Sheet?

The latest balance sheet data shows that Ramssol Group Berhad had liabilities of RM14.0m due within a year, and liabilities of RM6.04m falling due after that. Offsetting these obligations, it had cash of RM26.2m as well as receivables valued at RM27.3m due within 12 months. So it actually has RM33.5m more liquid assets than total liabilities.

This excess liquidity suggests that Ramssol Group 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 Ramssol Group Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Ramssol Group Berhad grew its EBIT by 297% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ramssol Group Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Ramssol Group 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. Over the last three years, Ramssol Group 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.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ramssol Group Berhad has net cash of RM11.6m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 297% over the last year. So we don't have any problem with Ramssol Group Berhad's use of debt. 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 instance, we've identified 3 warning signs for Ramssol Group Berhad (1 is significant) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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

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.