We Think CRG Berhad (KLSE:CRG) Can Stay On Top Of Its 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. As with many other companies CRG Incorporated Berhad (KLSE:CRG) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for CRG Berhad

What Is CRG Berhad's Debt?

As you can see below, CRG Berhad had RM13.8m of debt at December 2020, down from RM14.4m a year prior. 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?

We can see from the most recent balance sheet that CRG Berhad had liabilities of RM18.9m falling due within a year, and liabilities of RM22.6m due beyond 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.

In fact CRG Berhad's saving grace is its low debt levels, because its EBIT has tanked 41% in the last twelve months. 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 you can't view debt in total isolation; since CRG Berhad will need earnings to service that debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, CRG Berhad actually produced more free cash flow than EBIT. 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. The cherry on top was that in converted 234% of that EBIT to free cash flow, bringing in RM20m. So we are not troubled with CRG Berhad's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for CRG Berhad (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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. 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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