Here's Why Greenyield Berhad (KLSE:GREENYB) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Greenyield Berhad (KLSE:GREENYB) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Greenyield Berhad

What Is Greenyield Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Greenyield Berhad had RM7.60m of debt, an increase on RM5.50m, over one year. However, it does have RM1.29m in cash offsetting this, leading to net debt of about RM6.32m.

How Healthy Is Greenyield Berhad's Balance Sheet?

We can see from the most recent balance sheet that Greenyield Berhad had liabilities of RM13.6m falling due within a year, and liabilities of RM56.4m due beyond that. Offsetting these obligations, it had cash of RM1.29m as well as receivables valued at RM7.24m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM61.5m.

This deficit isn't so bad because Greenyield Berhad is worth RM135.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Greenyield Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Greenyield Berhad had a loss before interest and tax, and actually shrunk its revenue by 14%, to RM35m. That's not what we would hope to see.

Caveat Emptor

While Greenyield Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at RM7.9m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM2.3m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Greenyield Berhad (1 can't be ignored) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.