These 4 Measures Indicate That Deleum Berhad (KLSE:DELEUM) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Deleum Berhad (KLSE:DELEUM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Deleum Berhad's Net Debt?

As you can see below, at the end of March 2025, Deleum Berhad had RM13.0m of debt, up from RM5.00m a year ago. Click the image for more detail. But on the other hand it also has RM214.1m in cash, leading to a RM201.1m net cash position.

A Look At Deleum Berhad's Liabilities

According to the last reported balance sheet, Deleum Berhad had liabilities of RM175.4m due within 12 months, and liabilities of RM19.7m due beyond 12 months. Offsetting this, it had RM214.1m in cash and RM269.9m in receivables that were due within 12 months. So it actually has RM288.9m more liquid assets than total liabilities.

This surplus liquidity suggests that Deleum Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Deleum Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Deleum Berhad

On top of that, Deleum Berhad grew its EBIT by 73% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Deleum Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Deleum 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. Looking at the most recent three years, Deleum Berhad recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Deleum Berhad has RM201.1m in net cash and a decent-looking balance sheet. And we liked the look of last year's 73% year-on-year EBIT growth. So we don't think Deleum Berhad's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Deleum Berhad you should be aware of, and 1 of them shouldn't be ignored.

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.