Oceancash Pacific Berhad (KLSE:OCNCASH) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Oceancash Pacific Berhad (KLSE:OCNCASH) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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 December 2020 Oceancash Pacific Berhad had RM11.5m of debt, an increase on RM8.71m, over one year. However, it does have RM25.1m in cash offsetting this, leading to net cash of RM13.6m.

A Look At Oceancash Pacific Berhad's Liabilities

We can see from the most recent balance sheet that Oceancash Pacific Berhad had liabilities of RM16.7m falling due within a year, and liabilities of RM10.1m due beyond that. On the other hand, it had cash of RM25.1m and RM16.3m worth of receivables due within a year. So it can boast RM14.7m more liquid assets than total liabilities.

This surplus suggests that Oceancash Pacific Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

In fact Oceancash Pacific Berhad's saving grace is its low debt levels, because its EBIT has tanked 45% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. 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, 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. In the last three years, Oceancash Pacific Berhad's free cash flow amounted to 46% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Oceancash Pacific Berhad has net cash of RM13.6m, as well as more liquid assets than liabilities. So we don't have any problem with Oceancash Pacific Berhad's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Oceancash Pacific Berhad that 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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