Stock Analysis

Choo Bee Metal Industries Berhad (KLSE:CHOOBEE) Seems To Use Debt Rather Sparingly

KLSE:CHOOBEE
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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.' 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 Choo Bee Metal Industries Berhad (KLSE:CHOOBEE) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Choo Bee Metal Industries Berhad

How Much Debt Does Choo Bee Metal Industries Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Choo Bee Metal Industries Berhad had RM10.0m of debt, an increase on RM7.50m, over one year. However, its balance sheet shows it holds RM50.6m in cash, so it actually has RM40.6m net cash.

debt-equity-history-analysis
KLSE:CHOOBEE Debt to Equity History September 30th 2022

A Look At Choo Bee Metal Industries Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Choo Bee Metal Industries Berhad had liabilities of RM36.0m due within 12 months and liabilities of RM9.02m due beyond that. On the other hand, it had cash of RM50.6m and RM177.7m worth of receivables due within a year. So it can boast RM183.2m more liquid assets than total liabilities.

This luscious liquidity implies that Choo Bee Metal Industries Berhad's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Choo Bee Metal Industries Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Choo Bee Metal Industries Berhad has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Choo Bee Metal Industries Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Choo Bee Metal Industries 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, Choo Bee Metal Industries Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Choo Bee Metal Industries Berhad has RM40.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 25% over the last year. So is Choo Bee Metal Industries Berhad's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for Choo Bee Metal Industries Berhad you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Valuation is complex, but we're helping make it simple.

Find out whether Choo Bee Metal Industries Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.