Gas Malaysia Berhad (KLSE:GASMSIA) Seems To Use Debt Rather Sparingly

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.' 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. We can see that Gas Malaysia Berhad (KLSE:GASMSIA) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Gas Malaysia Berhad

How Much Debt Does Gas Malaysia Berhad Carry?

As you can see below, at the end of June 2024, Gas Malaysia Berhad had RM332.1m of debt, up from RM271.2m a year ago. Click the image for more detail. But on the other hand it also has RM696.9m in cash, leading to a RM364.8m net cash position.

How Strong Is Gas Malaysia Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gas Malaysia Berhad had liabilities of RM1.64b due within 12 months and liabilities of RM315.8m due beyond that. Offsetting these obligations, it had cash of RM696.9m as well as receivables valued at RM772.4m due within 12 months. So it has liabilities totalling RM490.3m more than its cash and near-term receivables, combined.

Since publicly traded Gas Malaysia Berhad shares are worth a total of RM5.12b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Gas Malaysia Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

While Gas Malaysia Berhad doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Gas Malaysia 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. During the last three years, Gas Malaysia Berhad produced sturdy free cash flow equating to 80% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Gas Malaysia Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM364.8m. And it impressed us with free cash flow of RM246m, being 80% 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. For example - Gas Malaysia Berhad has 1 warning sign we think you should be aware of.

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.