Is CRG Berhad (KLSE:CRG) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, CRG Incorporated Berhad (KLSE:CRG) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for CRG Berhad

How Much Debt Does CRG Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that CRG Berhad had RM11.6m of debt in June 2022, down from RM13.0m, one year before. But on the other hand it also has RM47.3m in cash, leading to a RM35.7m net cash position.

A Look At CRG Berhad's Liabilities

The latest balance sheet data shows that CRG Berhad had liabilities of RM19.9m due within a year, and liabilities of RM25.9m falling due after that. On the other hand, it had cash of RM47.3m and RM19.9m worth of receivables due within a year. So it actually has RM21.5m more liquid assets than total liabilities.

This short term liquidity is a sign that CRG Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, CRG Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, CRG Berhad grew its EBIT by 332% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 we empathize with investors who find debt concerning, you should keep in mind that CRG Berhad has net cash of RM35.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM18m, being 148% of its EBIT. So is CRG Berhad's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that CRG Berhad is showing 2 warning signs in our investment analysis , you should know about...

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. 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.