These 4 Measures Indicate That Carlsberg Brewery Malaysia Berhad (KLSE:CARLSBG) Is Using Debt Reasonably Well

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. We note that Carlsberg Brewery Malaysia Berhad (KLSE:CARLSBG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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

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 RM96.3m at the end of June 2024, a reduction from RM167.9m over a year. But it also has RM132.8m in cash to offset that, meaning it has RM36.4m net cash.

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

The latest balance sheet data shows that Carlsberg Brewery Malaysia Berhad had liabilities of RM826.8m due within a year, and liabilities of RM21.5m falling due after that. Offsetting these obligations, it had cash of RM132.8m as well as receivables valued at RM349.0m due within 12 months. So it has liabilities totalling RM366.5m more than its cash and near-term receivables, combined.

Since publicly traded Carlsberg Brewery Malaysia Berhad shares are worth a total of RM6.29b, 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!

While Carlsberg Brewery Malaysia Berhad doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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. During the last three years, Carlsberg Brewery Malaysia Berhad produced sturdy free cash flow equating to 64% 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 RM36.4m in net cash. So is Carlsberg Brewery Malaysia Berhad's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for Carlsberg Brewery Malaysia Berhad you should be aware of.

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.