Oceancash Pacific Berhad (KLSE:OCNCASH) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Oceancash Pacific Berhad (KLSE:OCNCASH) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Oceancash Pacific Berhad

What Is Oceancash Pacific Berhad's Debt?

As you can see below, at the end of December 2021, Oceancash Pacific Berhad had RM12.7m of debt, up from RM11.5m a year ago. Click the image for more detail. But it also has RM30.9m in cash to offset that, meaning it has RM18.2m net cash.

A Look At Oceancash Pacific Berhad's Liabilities

According to the last reported balance sheet, Oceancash Pacific Berhad had liabilities of RM17.7m due within 12 months, and liabilities of RM8.02m due beyond 12 months. Offsetting this, it had RM30.9m in cash and RM15.8m in receivables that were due within 12 months. So it actually has RM20.9m 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. Because it has plenty of assets, it is unlikely to have trouble with its lenders. 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.

Also good is that Oceancash Pacific Berhad grew its EBIT at 15% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Oceancash Pacific Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Oceancash Pacific Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Oceancash Pacific Berhad recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Oceancash Pacific Berhad has RM18.2m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 15% over the last year. So we don't think Oceancash Pacific Berhad's use of debt is risky. 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 - Oceancash Pacific Berhad has 3 warning signs we think you should be aware of.

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.