Does CAM Resources Berhad (KLSE:CAMRES) Have A Healthy Balance Sheet?

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. Importantly, CAM Resources Berhad (KLSE:CAMRES) does carry debt. 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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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

What Is CAM Resources Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that CAM Resources Berhad had RM15.2m of debt in September 2024, down from RM21.3m, one year before. But on the other hand it also has RM15.5m in cash, leading to a RM272.0k net cash position.

How Healthy Is CAM Resources Berhad's Balance Sheet?

The latest balance sheet data shows that CAM Resources Berhad had liabilities of RM30.0m due within a year, and liabilities of RM7.75m falling due after that. Offsetting these obligations, it had cash of RM15.5m as well as receivables valued at RM18.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM3.47m.

Of course, CAM Resources Berhad has a market capitalization of RM54.8m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, CAM Resources Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact CAM Resources Berhad's saving grace is its low debt levels, because its EBIT has tanked 66% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CAM Resources Berhad will need earnings to service that debt. 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. In the last three years, CAM Resources Berhad created free cash flow amounting to 19% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that CAM Resources Berhad has RM272.0k in net cash. So while CAM Resources Berhad does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with CAM Resources Berhad (including 1 which makes us a bit uncomfortable) .

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.