Is RedPlanet Berhad (KLSE:RPLANET) Using Too Much Debt?

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.' 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, RedPlanet Berhad (KLSE:RPLANET) does carry debt. But should shareholders be worried about its use of debt?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for RedPlanet Berhad

What Is RedPlanet Berhad's Net Debt?

As you can see below, at the end of December 2023, RedPlanet Berhad had RM7.85m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds RM17.2m in cash, so it actually has RM9.32m net cash.

How Healthy Is RedPlanet Berhad's Balance Sheet?

The latest balance sheet data shows that RedPlanet Berhad had liabilities of RM14.6m due within a year, and liabilities of RM7.75m falling due after that. On the other hand, it had cash of RM17.2m and RM6.65m worth of receivables due within a year. So it actually has RM1.51m more liquid assets than total liabilities.

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

In fact RedPlanet Berhad's saving grace is its low debt levels, because its EBIT has tanked 22% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is RedPlanet 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. RedPlanet 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 most recent three years, RedPlanet Berhad recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case RedPlanet Berhad has RM9.32m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM4.6m, being 76% of its EBIT. So we are not troubled with RedPlanet Berhad's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for RedPlanet Berhad (of which 1 doesn't sit too well with us!) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.