Oceancash Pacific Berhad (KLSE:OCNCASH) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Oceancash Pacific Berhad

How Much Debt Does Oceancash Pacific Berhad Carry?

The image below, which you can click on for greater detail, shows that Oceancash Pacific Berhad had debt of RM9.93m at the end of March 2023, a reduction from RM11.4m over a year. But on the other hand it also has RM30.0m in cash, leading to a RM20.0m net cash position.

How Strong Is Oceancash Pacific Berhad's Balance Sheet?

According to the last reported balance sheet, Oceancash Pacific Berhad had liabilities of RM10.5m due within 12 months, and liabilities of RM11.2m due beyond 12 months. Offsetting these obligations, it had cash of RM30.0m as well as receivables valued at RM22.7m due within 12 months. So it can boast RM31.0m more liquid assets than total liabilities.

This luscious liquidity implies that Oceancash Pacific Berhad's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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 positive, Oceancash Pacific Berhad grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. 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 cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Oceancash Pacific Berhad has net cash of RM20.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 28% year-on-year EBIT growth. So we don't think Oceancash Pacific Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Oceancash Pacific Berhad is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.