Is OCB Berhad (KLSE:OCB) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 OCB Berhad (KLSE:OCB) does use debt in its business. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for OCB Berhad

What Is OCB Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that OCB Berhad had RM37.1m in debt in September 2020; about the same as the year before. But on the other hand it also has RM58.1m in cash, leading to a RM21.0m net cash position.

How Healthy Is OCB Berhad's Balance Sheet?

We can see from the most recent balance sheet that OCB Berhad had liabilities of RM74.6m falling due within a year, and liabilities of RM19.2m due beyond that. On the other hand, it had cash of RM58.1m and RM45.3m worth of receivables due within a year. So it actually has RM9.60m more liquid assets than total liabilities.

This excess liquidity suggests that OCB Berhad is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, OCB Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is OCB Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, OCB Berhad reported revenue of RM282m, which is a gain of 21%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is OCB Berhad?

While OCB Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM13m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Keeping in mind its 21% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - OCB Berhad has 3 warning signs (and 1 which is concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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