CAM Resources Berhad (KLSE:CAMRES) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 CAM Resources Berhad (KLSE:CAMRES) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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 CAM Resources Berhad

How Much Debt Does CAM Resources Berhad Carry?

As you can see below, CAM Resources Berhad had RM22.7m of debt at September 2022, down from RM37.5m a year prior. However, its balance sheet shows it holds RM29.1m in cash, so it actually has RM6.35m net cash.

How Healthy Is CAM Resources Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CAM Resources Berhad had liabilities of RM35.9m due within 12 months and liabilities of RM11.8m due beyond that. On the other hand, it had cash of RM29.1m and RM14.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM4.24m.

Given CAM Resources Berhad has a market capitalization of RM71.1m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, CAM Resources Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that CAM Resources Berhad grew its EBIT by 131% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CAM Resources Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While CAM Resources 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, CAM Resources 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 it is always sensible to look at a company's total liabilities, it is very reassuring that CAM Resources Berhad has RM6.35m in net cash. And it impressed us with free cash flow of RM20m, being 143% of its EBIT. So we don't think CAM Resources Berhad's use of debt is risky. 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 - CAM Resources Berhad has 2 warning signs we think 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.

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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.