Carlsberg Brewery Malaysia Berhad (KLSE:CARLSBG) Has A Rock Solid Balance Sheet

Warren Buffett famously said, '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. Importantly, Carlsberg Brewery Malaysia Berhad (KLSE:CARLSBG) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Carlsberg Brewery Malaysia Berhad

What Is Carlsberg Brewery Malaysia Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Carlsberg Brewery Malaysia Berhad had debt of RM53.5m at the end of March 2022, a reduction from RM148.6m over a year. However, its balance sheet shows it holds RM253.2m in cash, so it actually has RM199.8m net cash.

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

According to the last reported balance sheet, Carlsberg Brewery Malaysia Berhad had liabilities of RM428.1m due within 12 months, and liabilities of RM30.3m due beyond 12 months. Offsetting this, it had RM253.2m in cash and RM69.8m in receivables that were due within 12 months. So its liabilities total RM135.4m more than the combination of its cash and short-term receivables.

Since publicly traded Carlsberg Brewery Malaysia Berhad shares are worth a total of RM6.67b, 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. Despite its noteworthy liabilities, Carlsberg Brewery Malaysia Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Carlsberg Brewery Malaysia Berhad has boosted its EBIT by 44%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Carlsberg Brewery Malaysia 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. Over the last three years, Carlsberg Brewery Malaysia Berhad recorded free cash flow worth a fulsome 97% 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 RM199.8m. And it impressed us with free cash flow of RM221m, being 97% of its EBIT. So is Carlsberg Brewery Malaysia 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Carlsberg Brewery Malaysia Berhad is showing 1 warning sign in our investment analysis , you should know about...

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.