Is Oceancash Pacific Berhad (KLSE:OCNCASH) A Risky Investment?

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. As with many other companies Oceancash Pacific Berhad (KLSE:OCNCASH) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. 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 Oceancash Pacific Berhad

How Much Debt Does Oceancash Pacific Berhad Carry?

As you can see below, Oceancash Pacific Berhad had RM12.1m of debt at September 2022, down from RM12.9m a year prior. However, it does have RM26.8m in cash offsetting this, leading to net cash of RM14.8m.

How Strong Is Oceancash Pacific Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Oceancash Pacific Berhad had liabilities of RM14.5m due within 12 months and liabilities of RM9.11m due beyond that. On the other hand, it had cash of RM26.8m and RM24.9m worth of receivables due within a year. So it actually has RM28.1m more liquid assets than total liabilities.

It's good to see that Oceancash Pacific Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Oceancash Pacific Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

While Oceancash Pacific Berhad doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is Oceancash Pacific 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 38% 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 RM14.8m in net cash and a decent-looking balance sheet. So is Oceancash Pacific 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. To that end, you should learn about the 3 warning signs we've spotted with Oceancash Pacific Berhad (including 1 which shouldn't be ignored) .

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.