Here's Why REDtone Digital Berhad (KLSE:REDTONE) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies REDtone Digital Berhad (KLSE:REDTONE) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for REDtone Digital Berhad

How Much Debt Does REDtone Digital Berhad Carry?

As you can see below, at the end of December 2024, REDtone Digital Berhad had RM7.11m of debt, up from RM1.16m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM51.8m in cash, so it actually has RM44.7m net cash.

How Healthy Is REDtone Digital Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that REDtone Digital Berhad had liabilities of RM147.1m due within 12 months and liabilities of RM14.8m due beyond that. Offsetting this, it had RM51.8m in cash and RM195.6m in receivables that were due within 12 months. So it can boast RM85.4m more liquid assets than total liabilities.

This surplus suggests that REDtone Digital Berhad is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, REDtone Digital Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, REDtone Digital Berhad saw its EBIT drop by 3.1% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine REDtone Digital Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. REDtone Digital 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, REDtone Digital Berhad's free cash flow amounted to 24% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case REDtone Digital Berhad has RM44.7m in net cash and a decent-looking balance sheet. So we don't have any problem with REDtone Digital Berhad's use of debt. 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 REDtone Digital Berhad is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.