We Think Carimin Petroleum Berhad (KLSE:CARIMIN) Can Stay On Top Of Its Debt

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.' 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, Carimin Petroleum Berhad (KLSE:CARIMIN) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Carimin Petroleum Berhad

How Much Debt Does Carimin Petroleum Berhad Carry?

As you can see below, Carimin Petroleum Berhad had RM34.4m of debt at March 2021, down from RM41.1m a year prior. But it also has RM105.5m in cash to offset that, meaning it has RM71.1m net cash.

A Look At Carimin Petroleum Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Carimin Petroleum Berhad had liabilities of RM92.5m due within 12 months and liabilities of RM22.5m due beyond that. Offsetting this, it had RM105.5m in cash and RM45.8m in receivables that were due within 12 months. So it actually has RM36.3m 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. Given it has easily adequate short term liquidity, we don't think it will have any 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!

In fact Carimin Petroleum Berhad's saving grace is its low debt levels, because its EBIT has tanked 41% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Carimin 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 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 generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Carimin Petroleum Berhad has net cash of RM71.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 155% of that EBIT to free cash flow, bringing in RM1.1m. So we don't think Carimin Petroleum Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Carimin Petroleum Berhad is showing 5 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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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