Carimin Petroleum Berhad (KLSE:CARIMIN) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Carimin Petroleum Berhad (KLSE:CARIMIN) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Carimin Petroleum Berhad

What Is Carimin Petroleum Berhad's Debt?

As you can see below, Carimin Petroleum Berhad had RM30.9m of debt at June 2021, down from RM41.1m a year prior. However, it does have RM97.0m in cash offsetting this, leading to net cash of RM66.1m.

How Strong Is Carimin Petroleum Berhad's Balance Sheet?

The latest balance sheet data shows that Carimin Petroleum Berhad had liabilities of RM98.6m due within a year, and liabilities of RM17.9m falling due after that. On the other hand, it had cash of RM97.0m and RM61.4m worth of receivables due within a year. So it can boast RM41.8m more liquid assets than total liabilities.

This surplus suggests that Carimin Petroleum Berhad is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Carimin Petroleum Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Carimin Petroleum Berhad's EBIT dived 18%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Carimin Petroleum Berhad will need earnings to service that debt. 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 company can only pay off debt with cold hard cash, not accounting profits. Carimin 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. Over the last three years, Carimin Petroleum Berhad actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Carimin Petroleum Berhad has net cash of RM66.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 148% of that EBIT to free cash flow, bringing in RM6.6m. So we don't think Carimin Petroleum Berhad's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Carimin Petroleum Berhad that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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