Is Careplus Group Berhad (KLSE:CAREPLS) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Careplus Group Berhad

How Much Debt Does Careplus Group Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Careplus Group Berhad had RM10.1m of debt in September 2021, down from RM27.6m, one year before. But it also has RM205.9m in cash to offset that, meaning it has RM195.9m net cash.

How Strong Is Careplus Group Berhad's Balance Sheet?

We can see from the most recent balance sheet that Careplus Group Berhad had liabilities of RM141.3m falling due within a year, and liabilities of RM15.8m due beyond that. Offsetting these obligations, it had cash of RM205.9m as well as receivables valued at RM70.5m due within 12 months. So it can boast RM119.3m more liquid assets than total liabilities.

It's good to see that Careplus Group Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. 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 247% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is Careplus Group 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. 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. During the last two years, Careplus Group Berhad produced sturdy free cash flow equating to 57% 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 we empathize with investors who find debt concerning, you should keep in mind that Careplus Group Berhad has net cash of RM195.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 247% over the last year. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Careplus Group Berhad (1 can't be ignored!) that you should be aware of before investing here.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.