Is Careplus Group Berhad (KLSE:CAREPLS) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we think about a company's use of debt, we first look at 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 RM17.0m of debt at June 2023, down from RM36.6m a year prior. However, its balance sheet shows it holds RM95.8m in cash, so it actually has RM78.8m 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 RM47.8m due within 12 months and liabilities of RM44.3m due beyond that. Offsetting this, it had RM95.8m in cash and RM25.3m in receivables that were due within 12 months. So it actually has RM29.1m 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. Because it has plenty of assets, it is unlikely to have trouble 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Careplus Group 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.

In the last year Careplus Group Berhad had a loss before interest and tax, and actually shrunk its revenue by 46%, to RM205m. That makes us nervous, to say the least.

So How Risky Is Careplus Group Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Careplus Group Berhad lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through RM33m of cash and made a loss of RM147m. Given it only has net cash of RM78.8m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that Careplus Group Berhad is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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. 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.