We Think Kretam Holdings Berhad (KLSE:KRETAM) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Kretam Holdings Berhad (KLSE:KRETAM) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Kretam Holdings Berhad

How Much Debt Does Kretam Holdings Berhad Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Kretam Holdings Berhad had debt of RM75.5m, up from RM45.2m in one year. But it also has RM174.0m in cash to offset that, meaning it has RM98.5m net cash.

How Healthy Is Kretam Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Kretam Holdings Berhad had liabilities of RM90.6m due within 12 months, and liabilities of RM117.2m due beyond 12 months. Offsetting these obligations, it had cash of RM174.0m as well as receivables valued at RM70.1m due within 12 months. So it actually has RM36.2m more liquid assets than total liabilities.

This surplus suggests that Kretam Holdings Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Kretam Holdings 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 Kretam Holdings Berhad has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kretam Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kretam 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, Kretam Holdings Berhad produced sturdy free cash flow equating to 71% 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 investigate a company's debt, in this case Kretam Holdings Berhad has RM98.5m in net cash and a decent-looking balance sheet. And we liked the look of last year's 36% year-on-year EBIT growth. So we don't think Kretam Holdings Berhad's use of debt is risky. 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. We've identified 1 warning sign with Kretam Holdings Berhad , and understanding them should be part of your investment process.

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.