Classita Holdings Berhad (KLSE:CLASSITA) Has Debt But No Earnings; Should You Worry?

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.' 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 can see that Classita Holdings Berhad (KLSE:CLASSITA) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Classita Holdings Berhad

What Is Classita Holdings Berhad's Net Debt?

As you can see below, Classita Holdings Berhad had RM7.32m of debt at December 2023, down from RM9.93m a year prior. But it also has RM89.4m in cash to offset that, meaning it has RM82.1m net cash.

How Healthy Is Classita Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Classita Holdings Berhad had liabilities of RM16.4m due within a year, and liabilities of RM11.4m falling due after that. Offsetting these obligations, it had cash of RM89.4m as well as receivables valued at RM18.7m due within 12 months. So it can boast RM80.2m more liquid assets than total liabilities.

This luscious liquidity implies that Classita Holdings Berhad's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Classita Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Classita 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.

Over 12 months, Classita Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM43m, which is a fall of 21%. That makes us nervous, to say the least.

So How Risky Is Classita Holdings Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Classita Holdings Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM23m and booked a RM8.8m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of RM82.1m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Classita Holdings Berhad (of which 3 are a bit concerning!) you should know about.

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.