These 4 Measures Indicate That Go Hub Capital Berhad (KLSE:GOHUB) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Go Hub Capital Berhad (KLSE:GOHUB) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Go Hub Capital Berhad

What Is Go Hub Capital Berhad's Net Debt?

As you can see below, Go Hub Capital Berhad had RM16.8m of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM27.7m in cash offsetting this, leading to net cash of RM10.8m.

How Strong Is Go Hub Capital Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Go Hub Capital Berhad had liabilities of RM12.1m due within 12 months and liabilities of RM14.0m due beyond that. On the other hand, it had cash of RM27.7m and RM31.7m worth of receivables due within a year. So it actually has RM33.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Go Hub Capital Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Go Hub Capital Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Go Hub Capital Berhad's load is not too heavy, because its EBIT was down 21% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Go Hub Capital 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Go Hub Capital 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. In the last three years, Go Hub Capital Berhad created free cash flow amounting to 3.9% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Go Hub Capital Berhad has RM10.8m in net cash and a decent-looking balance sheet. So we don't have any problem with Go Hub Capital Berhad's use of debt. 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. To that end, you should learn about the 3 warning signs we've spotted with Go Hub Capital Berhad (including 1 which is potentially serious) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.