Does Bermaz Auto Berhad (KLSE:BAUTO) Have A Healthy Balance Sheet?

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. We can see that Bermaz Auto Berhad (KLSE:BAUTO) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Our analysis indicates that BAUTO is potentially overvalued!

How Much Debt Does Bermaz Auto Berhad Carry?

The chart below, which you can click on for greater detail, shows that Bermaz Auto Berhad had RM199.9m in debt in July 2022; about the same as the year before. But it also has RM662.0m in cash to offset that, meaning it has RM462.1m net cash.

How Strong Is Bermaz Auto Berhad's Balance Sheet?

According to the last reported balance sheet, Bermaz Auto Berhad had liabilities of RM440.0m due within 12 months, and liabilities of RM400.9m due beyond 12 months. On the other hand, it had cash of RM662.0m and RM211.2m worth of receivables due within a year. So it actually has RM32.3m more liquid assets than total liabilities.

This state of affairs indicates that Bermaz Auto Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the RM2.56b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Bermaz Auto Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Bermaz Auto Berhad grew its EBIT by 90% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Bermaz Auto Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Bermaz Auto Berhad has RM462.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM337m, being 152% of its EBIT. So is Bermaz Auto Berhad's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Bermaz Auto Berhad .

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.