These 4 Measures Indicate That Focus Point Holdings Berhad (KLSE:FOCUSP) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Focus Point Holdings Berhad (KLSE:FOCUSP) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Focus Point Holdings Berhad

What Is Focus Point Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Focus Point Holdings Berhad had debt of RM26.9m at the end of March 2023, a reduction from RM39.0m over a year. However, it does have RM38.3m in cash offsetting this, leading to net cash of RM11.4m.

How Strong Is Focus Point Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Focus Point Holdings Berhad had liabilities of RM83.4m due within 12 months and liabilities of RM60.7m due beyond that. Offsetting this, it had RM38.3m in cash and RM27.6m in receivables that were due within 12 months. So it has liabilities totalling RM78.2m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Focus Point Holdings Berhad has a market capitalization of RM378.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Focus Point Holdings Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Focus Point Holdings Berhad grew its EBIT by 126% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Focus Point Holdings Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Focus Point Holdings 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. Over the last three years, Focus Point Holdings Berhad actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Focus Point Holdings Berhad does have more liabilities than liquid assets, it also has net cash of RM11.4m. The cherry on top was that in converted 167% of that EBIT to free cash flow, bringing in RM58m. So is Focus Point Holdings Berhad's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. 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 2 warning signs for Focus Point Holdings Berhad you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.