Bermaz Auto Berhad (KLSE:BAUTO) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Bermaz Auto Berhad (KLSE:BAUTO) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Bermaz Auto Berhad

How Much Debt Does Bermaz Auto Berhad Carry?

As you can see below, at the end of January 2021, Bermaz Auto Berhad had RM224.9m of debt, up from RM103.0m a year ago. Click the image for more detail. However, it does have RM578.9m in cash offsetting this, leading to net cash of RM354.0m.

How Strong Is Bermaz Auto Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bermaz Auto Berhad had liabilities of RM490.6m due within 12 months and liabilities of RM314.5m due beyond that. Offsetting these obligations, it had cash of RM578.9m as well as receivables valued at RM127.1m due within 12 months. So it has liabilities totalling RM99.0m more than its cash and near-term receivables, combined.

Of course, Bermaz Auto Berhad has a market capitalization of RM1.61b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Bermaz Auto Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Bermaz Auto Berhad if management cannot prevent a repeat of the 61% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Bermaz Auto Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Bermaz Auto 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. Happily for any shareholders, Bermaz Auto Berhad actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about Bermaz Auto Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM354.0m. The cherry on top was that in converted 128% of that EBIT to free cash flow, bringing in RM331m. So we don't have any problem with Bermaz Auto 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. For example - Bermaz Auto Berhad has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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