Gas Malaysia Berhad (KLSE:GASMSIA) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Gas Malaysia Berhad (KLSE:GASMSIA) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Gas Malaysia Berhad

What Is Gas Malaysia Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Gas Malaysia Berhad had RM331.2m of debt in June 2022, down from RM361.3m, one year before. However, it does have RM579.0m in cash offsetting this, leading to net cash of RM247.9m.

A Look At Gas Malaysia Berhad's Liabilities

According to the last reported balance sheet, Gas Malaysia Berhad had liabilities of RM1.51b due within 12 months, and liabilities of RM217.1m due beyond 12 months. Offsetting this, it had RM579.0m in cash and RM654.6m in receivables that were due within 12 months. So it has liabilities totalling RM494.2m more than its cash and near-term receivables, combined.

Given Gas Malaysia Berhad has a market capitalization of RM4.37b, it's hard to believe these liabilities pose much 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, Gas Malaysia Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Gas Malaysia Berhad has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Gas Malaysia 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Gas Malaysia 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. During the last three years, Gas Malaysia Berhad generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While Gas Malaysia Berhad does have more liabilities than liquid assets, it also has net cash of RM247.9m. And it impressed us with free cash flow of RM409m, being 90% of its EBIT. So we don't think Gas Malaysia Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Gas Malaysia Berhad (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.