These 4 Measures Indicate That Barakah Offshore Petroleum Berhad (KLSE:BARAKAH) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Barakah Offshore Petroleum Berhad (KLSE:BARAKAH) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Barakah Offshore Petroleum Berhad

What Is Barakah Offshore Petroleum Berhad's Net Debt?

As you can see below, Barakah Offshore Petroleum Berhad had RM49.2m of debt at December 2024, down from RM51.6m a year prior. But on the other hand it also has RM87.2m in cash, leading to a RM38.0m net cash position.

A Look At Barakah Offshore Petroleum Berhad's Liabilities

We can see from the most recent balance sheet that Barakah Offshore Petroleum Berhad had liabilities of RM107.2m falling due within a year, and liabilities of RM672.0k due beyond that. Offsetting these obligations, it had cash of RM87.2m as well as receivables valued at RM43.4m due within 12 months. So it actually has RM22.8m more liquid assets than total liabilities.

This luscious liquidity implies that Barakah Offshore Petroleum Berhad's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Barakah Offshore Petroleum Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Barakah Offshore Petroleum Berhad turned things around in the last 12 months, delivering and EBIT of RM37m. There's no doubt that we learn most about debt from the balance sheet. But it is Barakah Offshore Petroleum Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Barakah Offshore Petroleum 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. During the last year, Barakah Offshore Petroleum Berhad generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Barakah Offshore Petroleum Berhad has net cash of RM38.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in RM36m. So we don't think Barakah Offshore Petroleum 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. We've identified 2 warning signs with Barakah Offshore Petroleum Berhad , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.