These 4 Measures Indicate That Cepatwawasan Group Berhad (KLSE:CEPAT) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Cepatwawasan Group Berhad (KLSE:CEPAT) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. When we think about a company's use of debt, we first look at cash and debt 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 December 2021, down from RM91.0m, one year before. However, it does have RM52.7m in cash offsetting this, leading to net cash of RM8.34m.

How Strong Is Cepatwawasan Group Berhad's Balance Sheet?

The latest balance sheet data shows that Cepatwawasan Group Berhad had liabilities of RM44.1m due within a year, and liabilities of RM60.9m falling due after that. Offsetting this, it had RM52.7m in cash and RM18.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM33.7m.

Of course, Cepatwawasan Group Berhad has a market capitalization of RM287.3m, 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. While it does have liabilities worth noting, Cepatwawasan Group Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Cepatwawasan Group Berhad grew its EBIT by 175% 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Cepatwawasan Group Berhad actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although Cepatwawasan Group Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM8.34m. The cherry on top was that in converted 106% of that EBIT to free cash flow, bringing in RM75m. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Cepatwawasan Group Berhad is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.