Is Classita Holdings Berhad (KLSE:CLASSITA) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Classita Holdings Berhad

What Is Classita Holdings Berhad's Net Debt?

As you can see below, Classita Holdings Berhad had RM8.26m of debt at June 2023, down from RM16.6m a year prior. But on the other hand it also has RM82.8m in cash, leading to a RM74.5m net cash position.

A Look At Classita Holdings Berhad's Liabilities

The latest balance sheet data shows that Classita Holdings Berhad had liabilities of RM85.7m due within a year, and liabilities of RM12.5m falling due after that. Offsetting these obligations, it had cash of RM82.8m as well as receivables valued at RM8.01m due within 12 months. So its liabilities total RM7.38m more than the combination of its cash and short-term receivables.

Since publicly traded Classita Holdings Berhad shares are worth a total of RM61.6m, it seems unlikely that this level of liabilities would be a major 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, Classita Holdings Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Classita Holdings 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.

In the last year Classita Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 26%, to RM45m. That makes us nervous, to say the least.

So How Risky Is Classita Holdings Berhad?

While Classita Holdings Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM47m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For example Classita Holdings Berhad has 4 warning signs (and 3 which are potentially serious) we think you should know about.

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.