We Think Nestlé (Malaysia) Berhad (KLSE:NESTLE) Can Stay On Top Of Its Debt
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Nestlé (Malaysia) Berhad (KLSE:NESTLE) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
How Much Debt Does Nestlé (Malaysia) Berhad Carry?
The image below, which you can click on for greater detail, shows that Nestlé (Malaysia) Berhad had debt of RM585.8m at the end of September 2025, a reduction from RM952.7m over a year. However, because it has a cash reserve of RM12.7m, its net debt is less, at about RM573.1m.
How Strong Is Nestlé (Malaysia) Berhad's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Nestlé (Malaysia) Berhad had liabilities of RM2.40b due within 12 months and liabilities of RM645.8m due beyond that. On the other hand, it had cash of RM12.7m and RM554.2m worth of receivables due within a year. So its liabilities total RM2.48b more than the combination of its cash and short-term receivables.
Of course, Nestlé (Malaysia) Berhad has a market capitalization of RM26.2b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
View our latest analysis for Nestlé (Malaysia) Berhad
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Nestlé (Malaysia) Berhad's net debt is only 0.68 times its EBITDA. And its EBIT covers its interest expense a whopping 76.8 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. But the other side of the story is that Nestlé (Malaysia) Berhad saw its EBIT decline by 9.6% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Nestlé (Malaysia) 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Nestlé (Malaysia) Berhad generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Our View
The good news is that Nestlé (Malaysia) Berhad's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its EBIT growth rate. Taking all this data into account, it seems to us that Nestlé (Malaysia) Berhad takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Nestlé (Malaysia) Berhad , and understanding them should be part of your investment process.
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.