Farm Price Holdings Berhad (KLSE:FPHB) Has A Pretty Healthy Balance Sheet

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.' 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. We can see that Farm Price Holdings Berhad (KLSE:FPHB) does use debt in its business. But should shareholders be worried about its use of debt?

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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. 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. 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 think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Farm Price Holdings Berhad Carry?

The image below, which you can click on for greater detail, shows that Farm Price Holdings Berhad had debt of RM8.32m at the end of March 2025, a reduction from RM10.5m over a year. But on the other hand it also has RM23.9m in cash, leading to a RM15.6m net cash position.

How Strong Is Farm Price Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Farm Price Holdings Berhad had liabilities of RM10.8m due within 12 months, and liabilities of RM10.4m due beyond 12 months. Offsetting these obligations, it had cash of RM23.9m as well as receivables valued at RM19.2m due within 12 months. So it can boast RM21.9m more liquid assets than total liabilities.

This surplus suggests that Farm Price Holdings Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Farm Price Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Farm Price Holdings Berhad

Also good is that Farm Price Holdings Berhad grew its EBIT at 17% 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 Farm Price Holdings Berhad can strengthen its balance sheet over time. 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. Farm Price Holdings 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, Farm Price Holdings Berhad created free cash flow amounting to 8.6% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Farm Price Holdings Berhad has RM15.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 17% year-on-year EBIT growth. So we are not troubled with Farm Price Holdings Berhad's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Farm Price Holdings Berhad has 2 warning signs (and 1 which can't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.