Does Carlsberg Brewery Malaysia Berhad (KLSE:CARLSBG) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Carlsberg Brewery Malaysia Berhad (KLSE:CARLSBG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Carlsberg Brewery Malaysia Berhad

How Much Debt Does Carlsberg Brewery Malaysia Berhad Carry?

As you can see below, at the end of September 2023, Carlsberg Brewery Malaysia Berhad had RM129.8m of debt, up from RM76.2m a year ago. Click the image for more detail. But it also has RM150.6m in cash to offset that, meaning it has RM20.8m net cash.

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

The latest balance sheet data shows that Carlsberg Brewery Malaysia Berhad had liabilities of RM792.4m due within a year, and liabilities of RM21.8m falling due after that. On the other hand, it had cash of RM150.6m and RM350.4m worth of receivables due within a year. So it has liabilities totalling RM313.3m more than its cash and near-term receivables, combined.

Since publicly traded Carlsberg Brewery Malaysia Berhad shares are worth a total of RM5.81b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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!

On the other hand, Carlsberg Brewery Malaysia Berhad saw its EBIT drop by 8.3% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Carlsberg Brewery Malaysia Berhad can strengthen its balance sheet over time. 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. During the last three years, Carlsberg Brewery Malaysia Berhad produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Carlsberg Brewery Malaysia Berhad has RM20.8m in net cash. And it impressed us with free cash flow of RM189m, being 67% of its EBIT. So we don't have any problem with Carlsberg Brewery Malaysia Berhad's use of debt. 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. For example, we've discovered 2 warning signs for Carlsberg Brewery Malaysia Berhad (1 is a bit unpleasant!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.