Is GIIB Holdings Berhad (KLSE:GIIB) Using Too Much Debt?

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. We can see that GIIB Holdings Berhad (KLSE:GIIB) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for GIIB Holdings Berhad

What Is GIIB Holdings Berhad's Net Debt?

As you can see below, at the end of September 2024, GIIB Holdings Berhad had RM11.4m of debt, up from RM6.68m a year ago. Click the image for more detail. However, because it has a cash reserve of RM2.00m, its net debt is less, at about RM9.44m.

A Look At GIIB Holdings Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that GIIB Holdings Berhad had liabilities of RM36.0m due within 12 months and liabilities of RM23.8m due beyond that. On the other hand, it had cash of RM2.00m and RM14.8m worth of receivables due within a year. So its liabilities total RM43.0m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's RM39.0m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since GIIB Holdings 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.

Over 12 months, GIIB Holdings Berhad reported revenue of RM61m, which is a gain of 49%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate GIIB Holdings Berhad's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable RM19m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through RM8.4m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for GIIB Holdings Berhad you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.