Does Carimin Petroleum Berhad (KLSE:CARIMIN) Have A 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Carimin Petroleum Berhad (KLSE:CARIMIN) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Carimin Petroleum Berhad

What Is Carimin Petroleum Berhad's Net Debt?

As you can see below, Carimin Petroleum Berhad had RM29.9m of debt at September 2021, down from RM41.0m a year prior. But it also has RM95.3m in cash to offset that, meaning it has RM65.4m net cash.

A Look At Carimin Petroleum Berhad's Liabilities

According to the last reported balance sheet, Carimin Petroleum Berhad had liabilities of RM109.5m due within 12 months, and liabilities of RM16.1m due beyond 12 months. Offsetting these obligations, it had cash of RM95.3m as well as receivables valued at RM76.3m due within 12 months. So it can boast RM46.0m 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. Because it has plenty of assets, it is unlikely to have trouble 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 saw its EBIT drop by 6.2% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Carimin Petroleum 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Carimin Petroleum 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. Happily for any shareholders, Carimin Petroleum Berhad actually produced more free cash flow than EBIT over the last three years. 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 it is always sensible to investigate a company's debt, in this case Carimin Petroleum Berhad has RM65.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM6.4m, being 147% of its EBIT. So is Carimin Petroleum Berhad's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Carimin 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.

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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.