Careplus Group Berhad (KLSE:CAREPLS) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Careplus Group Berhad (KLSE:CAREPLS) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Careplus Group Berhad

What Is Careplus Group Berhad's Net Debt?

As you can see below, Careplus Group Berhad had RM16.2m of debt at December 2021, down from RM24.1m a year prior. But it also has RM123.8m in cash to offset that, meaning it has RM107.6m net cash.

A Look At Careplus Group Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Careplus Group Berhad had liabilities of RM114.4m due within 12 months and liabilities of RM26.2m due beyond that. On the other hand, it had cash of RM123.8m and RM71.1m worth of receivables due within a year. So it actually has RM54.3m more liquid assets than total liabilities.

This surplus suggests that Careplus Group Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Careplus Group Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Careplus Group Berhad grew its EBIT by 115% 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 Careplus 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Careplus Group 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. In the last two years, Careplus Group Berhad's free cash flow amounted to 29% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Careplus Group Berhad has net cash of RM107.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 115% year-on-year EBIT growth. So is Careplus Group Berhad's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Careplus Group Berhad you should be aware of, and 1 of them doesn't sit too well with us.

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.