Is Velesto Energy Berhad (KLSE:VELESTO) Using Too Much Debt?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Velesto Energy Berhad (KLSE:VELESTO) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is Velesto Energy Berhad's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Velesto Energy Berhad had RM116.3m of debt in September 2025, down from RM223.7m, one year before. But it also has RM128.0m in cash to offset that, meaning it has RM11.8m net cash.
How Strong Is Velesto Energy Berhad's Balance Sheet?
The latest balance sheet data shows that Velesto Energy Berhad had liabilities of RM348.4m due within a year, and liabilities of RM2.29m falling due after that. Offsetting this, it had RM128.0m in cash and RM337.4m in receivables that were due within 12 months. So it can boast RM114.8m more liquid assets than total liabilities.
This surplus suggests that Velesto Energy Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Velesto Energy Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!
View our latest analysis for Velesto Energy Berhad
But the bad news is that Velesto Energy Berhad has seen its EBIT plunge 13% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Velesto Energy Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Velesto Energy 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. Happily for any shareholders, Velesto Energy Berhad actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While it is always sensible to investigate a company's debt, in this case Velesto Energy Berhad has RM11.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM228m, being 101% of its EBIT. So we don't think Velesto Energy 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. Be aware that Velesto Energy Berhad is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...
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.