Cabnet Holdings Berhad (KLSE:CABNET) appears to be using debt sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” 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. Like many other companies Cabnet Holdings Berhad (KLSE: CABNET) resorts to debt. But does this debt worry shareholders?

When is debt a problem?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. 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.

Check out our latest analysis for Cabnet Holdings Berhad

How much debt does Cabnet Holdings Berhad have?

As you can see below, at the end of June 2022, Cabnet Holdings Berhad had a debt of RM18.8 million, compared to RM12.0 million a year ago. Click on the image for more details. However, as he has a cash reserve of RM11.4 million, his net debt is less at around RM7.42 million.

KLSE: CABNET Debt to Equity October 20, 2022

How strong is Cabnet Holdings Berhad’s balance sheet?

According to the latest published balance sheet, Cabnet Holdings Berhad had liabilities of RM48.9 million due within 12 months and liabilities of RM10.3 million due beyond 12 months. As compensation for these obligations, it had cash of RM11.4 million and receivables valued at RM59.6 million due within 12 months. So he actually has RM11.8 million After liquid assets than total liabilities.

This surplus strongly suggests that Cabnet Holdings Berhad has a rock-solid balance sheet (and debt is no problem). Given this fact, we believe its balance sheet is as strong as an ox.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Cabnet Holdings Berhad’s net debt of 2.0x EBITDA suggests judicious use of debt. And the attractive interest coverage (EBIT of 7.2 times interest expense) certainly makes not do everything to dispel this impression. We also note that Cabnet Holdings Berhad improved its EBIT from a loss last year to a positive RM2.8m. There is no doubt that we learn the most about debt from the balance sheet. But it is the earnings of Cabnet Holdings Berhad that will influence the balance sheet going forward. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Finally, while the taxman may love accounting profits, lenders only accept cash. It is therefore worth checking how much of earnings before interest and tax (EBIT) is supported by free cash flow. Over the past year, Cabnet Holdings Berhad has actually produced more free cash flow than EBIT. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our point of view

Fortunately, Cabnet Holdings Berhad’s impressive EBIT to free cash flow conversion means it has the upper hand on its debt. And the good news doesn’t stop there, since his total passive level also confirms this impression! Overall, we think Cabnet Holdings Berhad’s use of debt seems entirely reasonable and we are not concerned about that. Although debt carries risks, when used wisely, it can also generate a higher return on equity. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 3 warning signs for Cabnet Holdings Berhad (2 should not be ignored!) which you should be aware of before investing here.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, do not hesitate to discover our exclusive list of net cash growth stockstoday.

Valuation is complex, but we help make it simple.

Find out if Cabnet Holdings Berhad is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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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.

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