Does Oceancash Pacific Berhad (KLSE:OCNCASH) Have A Healthy Balance Sheet?

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.' 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 can see that Oceancash Pacific Berhad (KLSE:OCNCASH) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Oceancash Pacific Berhad

What Is Oceancash Pacific Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Oceancash Pacific Berhad had RM14.6m of debt, an increase on RM9.72m, over one year. However, it does have RM18.0m in cash offsetting this, leading to net cash of RM3.35m.

How Healthy Is Oceancash Pacific Berhad's Balance Sheet?

According to the last reported balance sheet, Oceancash Pacific Berhad had liabilities of RM19.7m due within 12 months, and liabilities of RM9.30m due beyond 12 months. Offsetting this, it had RM18.0m in cash and RM17.9m in receivables that were due within 12 months. So it actually has RM6.95m more liquid assets than total liabilities.

This short term liquidity is a sign that Oceancash Pacific Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Oceancash Pacific Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Oceancash Pacific Berhad if management cannot prevent a repeat of the 40% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Oceancash Pacific Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Oceancash Pacific 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. In the last three years, Oceancash Pacific Berhad's free cash flow amounted to 41% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Oceancash Pacific Berhad has RM3.35m in net cash and a decent-looking balance sheet. So we are not troubled with Oceancash Pacific Berhad's debt use. 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. For example, we've discovered 4 warning signs for Oceancash Pacific Berhad that you should be aware of before investing here.

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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