Is Chemlite Innovation Berhad (KLSE:CLITE) A Risky Investment?

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.' 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. We note that Chemlite Innovation Berhad (KLSE:CLITE) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

What Is Chemlite Innovation Berhad's Debt?

As you can see below, Chemlite Innovation Berhad had RM12.7m of debt, at March 2025, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM22.9m in cash offsetting this, leading to net cash of RM10.3m.

How Strong Is Chemlite Innovation Berhad's Balance Sheet?

The latest balance sheet data shows that Chemlite Innovation Berhad had liabilities of RM8.43m due within a year, and liabilities of RM12.1m falling due after that. On the other hand, it had cash of RM22.9m and RM21.5m worth of receivables due within a year. So it can boast RM23.8m more liquid assets than total liabilities.

This excess liquidity suggests that Chemlite Innovation Berhad is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Chemlite Innovation Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Chemlite Innovation Berhad

Importantly, Chemlite Innovation Berhad's EBIT fell a jaw-dropping 46% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is Chemlite Innovation 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Chemlite Innovation 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. Over the last three years, Chemlite Innovation Berhad reported free cash flow worth 8.5% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Chemlite Innovation Berhad has RM10.3m in net cash and a decent-looking balance sheet. So we don't have any problem with Chemlite Innovation Berhad's use of debt. 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. For instance, we've identified 3 warning signs for Chemlite Innovation Berhad (2 make us uncomfortable) 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.

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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.