NationGate Holdings Berhad (KLSE:NATGATE) Could Easily Take On More Debt

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. As with many other companies NationGate Holdings Berhad (KLSE:NATGATE) makes use of debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is NationGate Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 NationGate Holdings Berhad had debt of RM983.1m, up from RM80.5m in one year. But it also has RM1.93b in cash to offset that, meaning it has RM944.7m net cash.

How Strong Is NationGate Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that NationGate Holdings Berhad had liabilities of RM2.74b due within a year, and liabilities of RM48.5m falling due after that. Offsetting these obligations, it had cash of RM1.93b as well as receivables valued at RM531.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM324.3m.

Since publicly traded NationGate Holdings Berhad shares are worth a total of RM2.91b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, NationGate Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for NationGate Holdings Berhad

Better yet, NationGate Holdings Berhad grew its EBIT by 204% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if NationGate Holdings Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While NationGate Holdings 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. Happily for any shareholders, NationGate Holdings 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

Although NationGate Holdings Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM944.7m. And it impressed us with free cash flow of RM596m, being 157% of its EBIT. So is NationGate Holdings Berhad's debt a risk? It doesn't seem so to us. 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. For example NationGate Holdings Berhad has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.