Is Gamuda Berhad (KLSE:GAMUDA) Using Too Much 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. We note that Gamuda Berhad (KLSE:GAMUDA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

What Is Gamuda Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of April 2025 Gamuda Berhad had RM9.39b of debt, an increase on RM8.39b, over one year. On the flip side, it has RM3.96b in cash leading to net debt of about RM5.43b.

How Strong Is Gamuda Berhad's Balance Sheet?

We can see from the most recent balance sheet that Gamuda Berhad had liabilities of RM7.98b falling due within a year, and liabilities of RM8.90b due beyond that. Offsetting these obligations, it had cash of RM3.96b as well as receivables valued at RM9.47b due within 12 months. So its liabilities total RM3.45b more than the combination of its cash and short-term receivables.

Of course, Gamuda Berhad has a market capitalization of RM31.2b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

See our latest analysis for Gamuda Berhad

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

As it happens Gamuda Berhad has a fairly concerning net debt to EBITDA ratio of 5.2 but very strong interest coverage of 23.8. This means that unless the company has access to very cheap debt, that interest expense will likely grow in the future. It is well worth noting that Gamuda Berhad's EBIT shot up like bamboo after rain, gaining 39% in the last twelve months. That'll make it easier to manage its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Gamuda 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. Over the last three years, Gamuda Berhad saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

We weren't impressed with Gamuda Berhad's net debt to EBITDA, and its conversion of EBIT to free cash flow made us cautious. But its interest cover was significantly redeeming. Considering this range of data points, we think Gamuda Berhad is in a good position to manage its debt levels. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Gamuda Berhad .

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.