Is CRG Berhad (KLSE:CRG) using too much debt?

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. 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. Above all, CRG Incorporated Berhad (KLSE:CRG) is in debt. But should shareholders worry about its use of debt?

What risk does debt carry?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. 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. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for CRG Berhad

What is CRG Berhad’s debt?

You can click on the graph below for historical figures, but it shows that CRG Berhad had RM11.6 million in debt in June 2022, up from RM13.0 million a year earlier. But on the other hand, he also has RM47.3 million in cash, resulting in a net cash position of RM35.7 million.

KLSE: history of CRG’s debt to equity 7 October 2022

A look at CRG Berhad’s liabilities

The latest balance sheet data shows that CRG Berhad had liabilities of RM19.9 million due within one year, and liabilities of RM25.9 million falling due thereafter. On the other hand, it had cash of RM47.3 million and RM19.9 million of receivables due within one year. So he actually has 21.5 million RM After liquid assets than total liabilities.

This short-term liquidity is a sign that CRG Berhad could probably repay its debt easily, as its balance sheet is far from stretched. In short, CRG Berhad has a net cash position, so it is fair to say that it is not very leveraged!

Even better, CRG Berhad increased its EBIT by 332% last year, which is an impressive improvement. This boost will make it even easier to pay off debt in the future. The balance sheet is clearly the area to focus on when analyzing debt. But it is the results of CRG Berhad that will influence the holding of the balance sheet in the future. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. CRG Berhad may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Fortunately for all shareholders, CRG Berhad has actually produced more free cash flow than EBIT over the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summary

While we sympathize with investors who find debt a concern, you should bear in mind that CRG Berhad has a net cash position of RM35.7 million, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM18m, or 148% of its EBIT. Is CRG Berhad’s debt then a risk? This does not seem to us to be the case. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Be aware that CRG Berhad displays 2 warning signs in our investment analysis you should know…

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

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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