Is Classita Holdings Berhad (KLSE:CLASSITA) Weighed On By Its Debt Load?

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.' 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. We can see that Classita Holdings Berhad (KLSE:CLASSITA) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Classita Holdings Berhad

How Much Debt Does Classita Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Classita Holdings Berhad had RM6.65m of debt in March 2024, down from RM8.67m, one year before. However, it does have RM86.9m in cash offsetting this, leading to net cash of RM80.3m.

A Look At Classita Holdings Berhad's Liabilities

The latest balance sheet data shows that Classita Holdings Berhad had liabilities of RM19.2m due within a year, and liabilities of RM11.3m falling due after that. Offsetting this, it had RM86.9m in cash and RM16.0m in receivables that were due within 12 months. So it actually has RM72.4m more liquid assets than total liabilities.

This surplus strongly suggests that Classita Holdings Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). 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! There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Classita Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 7.9%, to RM48m. That's not what we would hope to see.

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 we do note that Classita Holdings Berhad had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through RM24m of cash and made a loss of RM10m. While this does make the company a bit risky, it's important to remember it has net cash of RM80.3m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Classita Holdings Berhad (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.