Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Mostly, Oceancash Pacific Berhad (KLSE:OCNCASH) is in debt. But does this debt worry shareholders?

When is debt a problem?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.

See our latest analysis for Oceancash Pacific Berhad

What is Oceancash Pacific Berhad’s debt?

As you can see below, at the end of December 2021, Oceancash Pacific Berhad had a debt of RM12.7 million, compared to RM11.5 million a year ago. Click on the image for more details. But he also has RM30.9m in cash to make up for that, meaning he has a net cash of RM18.2m.

A Look at Oceancash Pacific Berhad’s Liabilities

According to the latest published balance sheet, Oceancash Pacific Berhad had liabilities of RM17.7 million due within 12 months and liabilities of RM8.02 million due beyond 12 months. In return, he had RM30.9 million in cash and RM15.8 million in debt due within 12 months. So he actually has 20.9 million RM Continued liquid assets than total liabilities.

It’s good to see that Oceancash Pacific Berhad has plenty of cash on its balance sheet, suggesting careful liability management. Because he has a lot of assets, he is unlikely to have any problems with his lenders. Simply put, the fact that Oceancash Pacific Berhad has more cash than debt is arguably a good indication that it can safely manage its debt.

Another good thing is that Oceancash Pacific Berhad increased its EBIT by 15% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Oceancash Pacific Berhad can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, while the taxman may love accounting profits, lenders only accept cash. Although Oceancash Pacific Berhad has net cash on its balance sheet, it is still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it builds (or erodes) cash balance. Over the past three years, Oceancash Pacific Berhad has recorded free cash flow of 53% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.

Abstract

While it’s always a good idea to investigate a company’s debt, in this case Oceancash Pacific Berhad has RM18.2 million in net cash and a decent balance sheet. And he impressed us with his EBIT growth of 15% over last year. We therefore do not believe that Oceancash Pacific Berhad’s use of debt is risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example – Oceancash Pacific Berhad has 3 warning signs we think you should know.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.