Stock Analysis

These 4 Measures Indicate That Choo Bee Metal Industries Berhad (KLSE:CHOOBEE) Is Using Debt Reasonably Well

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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Choo Bee Metal Industries Berhad

How Much Debt Does Choo Bee Metal Industries Berhad Carry?

The image below, which you can click on for greater detail, shows that Choo Bee Metal Industries Berhad had debt of RM7.50m at the end of June 2021, a reduction from RM11.1m over a year. However, it does have RM67.8m in cash offsetting this, leading to net cash of RM60.3m.

KLSE:CHOOBEE Debt to Equity History October 12th 2021

How Healthy Is Choo Bee Metal Industries Berhad's Balance Sheet?

We can see from the most recent balance sheet that Choo Bee Metal Industries Berhad had liabilities of RM36.1m falling due within a year, and liabilities of RM11.2m due beyond that. Offsetting this, it had RM67.8m in cash and RM145.8m in receivables that were due within 12 months. So it can boast RM166.3m more liquid assets than total liabilities.

This surplus strongly suggests that Choo Bee Metal Industries Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Choo Bee Metal Industries Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Choo Bee Metal Industries Berhad turned things around in the last 12 months, delivering and EBIT of RM84m. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Choo Bee Metal Industries 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. During the last year, Choo Bee Metal Industries Berhad burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Choo Bee Metal Industries Berhad has net cash of RM60.3m, as well as more liquid assets than liabilities. So we are not troubled with Choo Bee Metal Industries Berhad's debt use. 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. For instance, we've identified 3 warning signs for Choo Bee Metal Industries Berhad (2 are a bit unpleasant) you should be aware of.

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.

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.

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