We Think Carlsberg Brewery Malaysia Berhad (KLSE:CARLSBG) Can Manage Its Debt With Ease

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.' 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. As with many other companies Carlsberg Brewery Malaysia Berhad (KLSE:CARLSBG) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Carlsberg Brewery Malaysia Berhad

What Is Carlsberg Brewery Malaysia Berhad's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Carlsberg Brewery Malaysia Berhad had debt of RM116.5m, up from RM77.7m in one year. However, it does have RM126.3m in cash offsetting this, leading to net cash of RM9.81m.

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

The latest balance sheet data shows that Carlsberg Brewery Malaysia Berhad had liabilities of RM549.0m due within a year, and liabilities of RM27.4m falling due after that. On the other hand, it had cash of RM126.3m and RM127.6m worth of receivables due within a year. So it has liabilities totalling RM322.5m more than its cash and near-term receivables, combined.

Of course, Carlsberg Brewery Malaysia Berhad has a market capitalization of RM6.76b, so these liabilities are probably manageable. 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 59%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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 89% 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 RM9.81m. And it impressed us with free cash flow of RM225m, being 89% of its EBIT. So we don't think Carlsberg Brewery Malaysia Berhad's use of debt is risky. 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. For example, we've discovered 2 warning signs for Carlsberg Brewery Malaysia Berhad that you should be aware of before investing here.

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.

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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.