Is CCK Consolidated Holdings Berhad (KLSE:CCK) Using Too Much Debt?

Warren Buffett famously said, '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. Importantly, CCK Consolidated Holdings Berhad (KLSE:CCK) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 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 CCK Consolidated Holdings Berhad

How Much Debt Does CCK Consolidated Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that CCK Consolidated Holdings Berhad had RM43.6m of debt in December 2020, down from RM51.1m, one year before. But on the other hand it also has RM62.2m in cash, leading to a RM18.6m net cash position.

How Strong Is CCK Consolidated Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, CCK Consolidated Holdings Berhad had liabilities of RM88.0m due within 12 months, and liabilities of RM36.9m due beyond 12 months. Offsetting these obligations, it had cash of RM62.2m as well as receivables valued at RM36.1m due within 12 months. So it has liabilities totalling RM26.5m more than its cash and near-term receivables, combined.

Of course, CCK Consolidated Holdings Berhad has a market capitalization of RM429.3m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, CCK Consolidated Holdings Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that CCK Consolidated Holdings Berhad has increased its EBIT by 4.5% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine CCK Consolidated Holdings 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. CCK Consolidated Holdings 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, CCK Consolidated Holdings Berhad produced sturdy free cash flow equating to 61% 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 CCK Consolidated Holdings Berhad has RM18.6m in net cash. So is CCK Consolidated Holdings 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. For example - CCK Consolidated Holdings Berhad has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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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