We Think Carlo Rino Group Berhad (KLSE:CRG) Can Manage Its Debt With Ease

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.' 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. As with many other companies Carlo Rino Group Berhad (KLSE:CRG) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Carlo Rino Group Berhad

What Is Carlo Rino Group Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Carlo Rino Group Berhad had RM10.9m of debt in December 2022, down from RM12.3m, one year before. But on the other hand it also has RM44.6m in cash, leading to a RM33.7m 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 RM21.4m due within a year, and liabilities of RM23.7m falling due after that. Offsetting these obligations, it had cash of RM44.6m as well as receivables valued at RM19.7m due within 12 months. So it can boast RM19.1m more liquid assets than total liabilities.

This surplus suggests that Carlo Rino Group Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Carlo Rino Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Carlo Rino Group Berhad grew its EBIT by 338% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Carlo Rino Group 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 Carlo Rino Group 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, Carlo Rino Group Berhad actually produced more free cash flow than EBIT. 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 Carlo Rino Group Berhad has RM33.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM22m, being 108% of its EBIT. So is Carlo Rino Group Berhad's debt a risk? It doesn't seem so to us. 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. Be aware that Carlo Rino Group Berhad is showing 2 warning signs in our investment analysis , 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.