Carlsberg Brewery Malaysia Berhad (KLSE:CARLSBG) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 note that Carlsberg Brewery Malaysia Berhad (KLSE:CARLSBG) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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.

See our latest analysis for Carlsberg Brewery Malaysia Berhad

How Much Debt Does Carlsberg Brewery Malaysia Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Carlsberg Brewery Malaysia Berhad had RM38.8m of debt in December 2021, down from RM122.5m, one year before. However, it does have RM77.4m in cash offsetting this, leading to net cash of RM38.6m.

How Healthy Is Carlsberg Brewery Malaysia Berhad's Balance Sheet?

The latest balance sheet data shows that Carlsberg Brewery Malaysia Berhad had liabilities of RM382.4m due within a year, and liabilities of RM23.5m falling due after that. Offsetting these obligations, it had cash of RM77.4m as well as receivables valued at RM96.0m due within 12 months. So it has liabilities totalling RM232.4m more than its cash and near-term receivables, combined.

Given Carlsberg Brewery Malaysia Berhad has a market capitalization of RM6.34b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Carlsberg Brewery Malaysia Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Carlsberg Brewery Malaysia Berhad has been able to increase its EBIT by 22% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Carlsberg Brewery Malaysia 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Carlsberg Brewery Malaysia 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, Carlsberg Brewery Malaysia Berhad recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about Carlsberg Brewery Malaysia Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM38.6m. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in RM218m. So is Carlsberg Brewery Malaysia Berhad's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for Carlsberg Brewery Malaysia Berhad you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.