RedPlanet Berhad (KLSE:RPLANET) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies RedPlanet Berhad (KLSE:RPLANET) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for RedPlanet Berhad

What Is RedPlanet Berhad's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 RedPlanet Berhad had debt of RM9.11m, up from none in one year. However, it does have RM12.5m in cash offsetting this, leading to net cash of RM3.43m.

How Strong Is RedPlanet Berhad's Balance Sheet?

The latest balance sheet data shows that RedPlanet Berhad had liabilities of RM14.7m due within a year, and liabilities of RM7.47m falling due after that. Offsetting these obligations, it had cash of RM12.5m as well as receivables valued at RM10.0m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to RedPlanet Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the RM37.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, RedPlanet Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that RedPlanet Berhad has increased its EBIT by 8.6% over twelve months, which should ease any concerns about debt repayment. 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 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. While RedPlanet Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, RedPlanet Berhad recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that RedPlanet Berhad has net cash of RM3.43m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 8.6% in the last twelve months. So is RedPlanet 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that RedPlanet Berhad is showing 6 warning signs in our investment analysis , and 3 of those are potentially serious...

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. 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.