Cepatwawasan Group Berhad (KLSE:CEPAT) Could Easily Take On More Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Cepatwawasan Group Berhad (KLSE:CEPAT) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Cepatwawasan Group Berhad

How Much Debt Does Cepatwawasan Group Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Cepatwawasan Group Berhad had RM44.4m of debt in June 2022, down from RM78.2m, one year before. However, its balance sheet shows it holds RM76.2m in cash, so it actually has RM31.9m net cash.

A Look At Cepatwawasan Group Berhad's Liabilities

According to the last reported balance sheet, Cepatwawasan Group Berhad had liabilities of RM47.4m due within 12 months, and liabilities of RM58.4m due beyond 12 months. On the other hand, it had cash of RM76.2m and RM20.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM9.50m.

Since publicly traded Cepatwawasan Group Berhad shares are worth a total of RM211.6m, 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, Cepatwawasan Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Cepatwawasan Group Berhad grew its EBIT by 123% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Cepatwawasan Group Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Cepatwawasan Group 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. Happily for any shareholders, Cepatwawasan Group Berhad actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Cepatwawasan Group Berhad has RM31.9m in net cash. The cherry on top was that in converted 107% of that EBIT to free cash flow, bringing in RM85m. So is Cepatwawasan Group Berhad's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Cepatwawasan Group Berhad 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.