Is Carlo Rino Group Berhad (KLSE:CARLORINO) A Risky Investment?

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.' 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. Importantly, Carlo Rino Group Berhad (KLSE:CARLORINO) does carry debt. But should shareholders be worried about its use of debt?

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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. 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. 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 Carlo Rino Group Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Carlo Rino Group Berhad had RM6.91m of debt in December 2024, down from RM19.1m, one year before. But on the other hand it also has RM82.7m in cash, leading to a RM75.8m net cash position.

A Look At Carlo Rino Group Berhad's Liabilities

The latest balance sheet data shows that Carlo Rino Group Berhad had liabilities of RM15.6m due within a year, and liabilities of RM24.2m falling due after that. On the other hand, it had cash of RM82.7m and RM19.8m worth of receivables due within a year. So it can boast RM62.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that Carlo Rino Group Berhad's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Carlo Rino Group Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Carlo Rino Group Berhad

But the bad news is that Carlo Rino Group Berhad has seen its EBIT plunge 11% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Carlo Rino Group Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot .

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Carlo Rino Group 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. Looking at the most recent three years, Carlo Rino Group Berhad recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Carlo Rino Group Berhad has net cash of RM75.8m, as well as more liquid assets than liabilities. So we don't think Carlo Rino Group Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Carlo Rino Group Berhad you should be aware of.

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.