We Think CAM Resources Berhad (KLSE:CAMRES) Can Manage Its Debt With Ease

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.' 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. We note that CAM Resources Berhad (KLSE:CAMRES) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for CAM Resources Berhad

How Much Debt Does CAM Resources Berhad Carry?

The image below, which you can click on for greater detail, shows that CAM Resources Berhad had debt of RM25.7m at the end of March 2023, a reduction from RM33.5m over a year. But on the other hand it also has RM29.0m in cash, leading to a RM3.23m net cash position.

How Strong Is CAM Resources Berhad's Balance Sheet?

We can see from the most recent balance sheet that CAM Resources Berhad had liabilities of RM36.5m falling due within a year, and liabilities of RM11.2m due beyond that. On the other hand, it had cash of RM29.0m and RM16.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM2.18m.

Given CAM Resources Berhad has a market capitalization of RM73.5m, it's hard to believe these liabilities pose much threat. 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 addition to that, we're happy to report that CAM Resources Berhad has boosted its EBIT by 48%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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. CAM Resources 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, CAM Resources Berhad actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about CAM Resources Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM3.23m. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in RM11m. So is CAM Resources 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that CAM Resources Berhad is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.