Is Cahya Mata Sarawak Berhad (KLSE:CMSB) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Cahya Mata Sarawak Berhad (KLSE:CMSB) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Cahya Mata Sarawak Berhad

How Much Debt Does Cahya Mata Sarawak Berhad Carry?

The image below, which you can click on for greater detail, shows that Cahya Mata Sarawak Berhad had debt of RM304.2m at the end of March 2024, a reduction from RM511.4m over a year. However, its balance sheet shows it holds RM706.3m in cash, so it actually has RM402.1m net cash.

How Healthy Is Cahya Mata Sarawak Berhad's Balance Sheet?

We can see from the most recent balance sheet that Cahya Mata Sarawak Berhad had liabilities of RM695.7m falling due within a year, and liabilities of RM319.5m due beyond that. Offsetting these obligations, it had cash of RM706.3m as well as receivables valued at RM280.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM28.1m.

Of course, Cahya Mata Sarawak Berhad has a market capitalization of RM1.26b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Cahya Mata Sarawak Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, Cahya Mata Sarawak Berhad is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 1,132% gain in the last twelve months. 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 Cahya Mata Sarawak 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. Cahya Mata Sarawak 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 two years, Cahya Mata Sarawak Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Cahya Mata Sarawak Berhad has RM402.1m in net cash. And we liked the look of last year's 1,132% year-on-year EBIT growth. So we don't have any problem with Cahya Mata Sarawak Berhad's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Cahya Mata Sarawak Berhad you should know about.

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.

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