Elridge Energy Holdings Berhad (KLSE:ELRIDGE) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Elridge Energy Holdings Berhad (KLSE:ELRIDGE) makes use of debt. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Elridge Energy Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Elridge Energy Holdings Berhad had RM48.8m of debt, an increase on RM27.6m, over one year. But it also has RM162.3m in cash to offset that, meaning it has RM113.5m net cash.

A Look At Elridge Energy Holdings Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Elridge Energy Holdings Berhad had liabilities of RM68.8m due within 12 months and liabilities of RM10.6m due beyond that. Offsetting this, it had RM162.3m in cash and RM57.3m in receivables that were due within 12 months. So it actually has RM140.1m more liquid assets than total liabilities.

This surplus suggests that Elridge Energy Holdings Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Elridge Energy Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Elridge Energy Holdings Berhad

In addition to that, we're happy to report that Elridge Energy Holdings Berhad has boosted its EBIT by 70%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Elridge Energy Holdings 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Elridge Energy Holdings 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, Elridge Energy Holdings Berhad recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Elridge Energy Holdings Berhad has net cash of RM113.5m, as well as more liquid assets than liabilities. And we liked the look of last year's 70% year-on-year EBIT growth. So is Elridge Energy Holdings Berhad's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Elridge Energy Holdings Berhad that you should be aware of before investing here.

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.