Carlsberg Brewery Malaysia Berhad (KLSE:CARLSBG) Has A Pretty Healthy Balance Sheet

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.' 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. We can see that Carlsberg Brewery Malaysia Berhad (KLSE:CARLSBG) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

See our latest analysis for Carlsberg Brewery Malaysia Berhad

How Much Debt Does Carlsberg Brewery Malaysia Berhad Carry?

The image below, which you can click on for greater detail, shows that Carlsberg Brewery Malaysia Berhad had debt of RM77.7m at the end of June 2021, a reduction from RM134.5m over a year. However, its balance sheet shows it holds RM95.7m in cash, so it actually has RM18.0m net cash.

A Look At Carlsberg Brewery Malaysia Berhad's Liabilities

According to the last reported balance sheet, Carlsberg Brewery Malaysia Berhad had liabilities of RM356.9m due within 12 months, and liabilities of RM30.4m due beyond 12 months. Offsetting this, it had RM95.7m in cash and RM65.9m in receivables that were due within 12 months. So it has liabilities totalling RM225.7m more than its cash and near-term receivables, combined.

Since publicly traded Carlsberg Brewery Malaysia Berhad shares are worth a total of RM6.48b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

The modesty of its debt load may become crucial for Carlsberg Brewery Malaysia Berhad if management cannot prevent a repeat of the 21% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 92% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

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 RM18.0m. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in RM289m. So we are not troubled with Carlsberg Brewery Malaysia Berhad's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Carlsberg Brewery Malaysia Berhad you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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