Does Careplus Group Berhad (KLSE:CAREPLS) Have A Healthy Balance Sheet?

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. Importantly, Careplus Group Berhad (KLSE:CAREPLS) does carry 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Careplus Group Berhad

What Is Careplus Group Berhad's Net Debt?

As you can see below, Careplus Group Berhad had RM24.1m of debt at December 2020, down from RM76.2m a year prior. However, its balance sheet shows it holds RM64.7m in cash, so it actually has RM40.6m net cash.

How Healthy Is Careplus Group Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Careplus Group Berhad had liabilities of RM158.2m due within 12 months and liabilities of RM21.6m due beyond that. Offsetting these obligations, it had cash of RM64.7m as well as receivables valued at RM68.4m due within 12 months. So it has liabilities totalling RM46.7m more than its cash and near-term receivables, combined.

Since publicly traded Careplus Group Berhad shares are worth a total of RM1.33b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Careplus Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Careplus Group Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM123m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Careplus Group Berhad will need earnings to service that debt. 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. While Careplus 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. Looking at the most recent year, Careplus Group Berhad recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Careplus Group Berhad has RM40.6m in net cash. So we don't have any problem with Careplus Group Berhad's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Careplus Group Berhad (of which 1 is concerning!) you should know about.

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. 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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