We Think Green Ocean Corporation Berhad (KLSE:GOCEAN) Can Stay On Top Of Its Debt

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.' 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. As with many other companies Green Ocean Corporation Berhad (KLSE:GOCEAN) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Green Ocean Corporation Berhad

What Is Green Ocean Corporation Berhad's Net Debt?

As you can see below, at the end of September 2023, Green Ocean Corporation Berhad had RM16.0m of debt, up from RM6.80m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM86.8m in cash, so it actually has RM70.7m net cash.

How Strong Is Green Ocean Corporation Berhad's Balance Sheet?

The latest balance sheet data shows that Green Ocean Corporation Berhad had liabilities of RM13.3m due within a year, and liabilities of RM6.34m falling due after that. Offsetting this, it had RM86.8m in cash and RM37.3m in receivables that were due within 12 months. So it can boast RM104.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Green Ocean Corporation Berhad's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Green Ocean Corporation Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Green Ocean Corporation Berhad turned things around in the last 12 months, delivering and EBIT of RM6.2m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Green Ocean Corporation 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Green Ocean Corporation 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 year, Green Ocean Corporation Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that Green Ocean Corporation Berhad has net cash of RM70.7m and plenty of liquid assets. So we don't have any problem with Green Ocean Corporation Berhad's use of debt. 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 Green Ocean Corporation Berhad is showing 4 warning signs in our investment analysis , and 3 of those can't be ignored...

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.