CRG Berhad (KLSE:CRG) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies CRG Incorporated Berhad (KLSE:CRG) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CRG Berhad

How Much Debt Does CRG Berhad Carry?

The image below, which you can click on for greater detail, shows that CRG Berhad had debt of RM13.8m at the end of December 2020, a reduction from RM14.4m over a year. But it also has RM41.0m in cash to offset that, meaning it has RM27.3m net cash.

How Healthy Is CRG Berhad's Balance Sheet?

The latest balance sheet data shows that CRG Berhad had liabilities of RM18.9m due within a year, and liabilities of RM22.6m falling due after that. On the other hand, it had cash of RM41.0m and RM13.5m worth of receivables due within a year. So it actually has RM13.0m more liquid assets than total liabilities.

This surplus suggests that CRG Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that CRG Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for CRG Berhad if management cannot prevent a repeat of the 41% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CRG 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. CRG 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. Happily for any shareholders, CRG Berhad actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case CRG Berhad has RM27.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM20m, being 234% of its EBIT. So we are not troubled with CRG Berhad's debt use. 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. For instance, we've identified 4 warning signs for CRG Berhad (1 is significant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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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