Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. Importantly, Oceancash Pacific Berhad (KLSE:OCNCASH) does carry debt. But the more important question is: how much risk is that debt creating?
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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
Check out our latest analysis for Oceancash Pacific Berhad
You can click the graphic below for the historical numbers, but it shows that as of June 2022 Oceancash Pacific Berhad had RM13.2m of debt, an increase on RM11.5m, over one year. But it also has RM28.0m in cash to offset that, meaning it has RM14.8m net cash.
According to the last reported balance sheet, Oceancash Pacific Berhad had liabilities of RM14.5m due within 12 months, and liabilities of RM9.71m due beyond 12 months. On the other hand, it had cash of RM28.0m and RM20.0m worth of receivables due within a year. So it actually has RM23.8m more liquid assets than total liabilities.
This surplus liquidity suggests that Oceancash Pacific Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Oceancash Pacific Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.
On the other hand, Oceancash Pacific Berhad's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Oceancash Pacific Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Oceancash Pacific 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, Oceancash Pacific Berhad's free cash flow amounted to 30% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
While it is always sensible to investigate a company's debt, in this case Oceancash Pacific Berhad has RM14.8m in net cash and a decent-looking balance sheet. So we are not troubled with Oceancash Pacific Berhad's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. Case in point: We've spotted 3 warning signs for Oceancash Pacific Berhad you should be aware of, and 1 of them is potentially serious.
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.
Find out whether Oceancash Pacific Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.
Oceancash Pacific Berhad, an investment holding company, manufactures and trades in non-woven products in Malaysia, Indonesia, Japan, Thailand, and internationally.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet with proven track record.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.
Oceancash Pacific Berhad, an investment holding company, manufactures and trades in non-woven products in Malaysia, Indonesia, Japan, Thailand, and internationally.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet with proven track record.
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