Is Greenyield Berhad (KLSE:GREENYB) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Greenyield Berhad (KLSE:GREENYB) does use debt in its business. But should shareholders be worried about its use of debt?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Greenyield Berhad

What Is Greenyield Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Greenyield Berhad had RM13.0m of debt in June 2021, down from RM17.3m, one year before. However, its balance sheet shows it holds RM14.6m in cash, so it actually has RM1.58m net cash.

How Healthy Is Greenyield Berhad's Balance Sheet?

According to the last reported balance sheet, Greenyield Berhad had liabilities of RM6.00m due within 12 months, and liabilities of RM14.2m due beyond 12 months. Offsetting this, it had RM14.6m in cash and RM5.67m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Greenyield Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the RM100.1m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Greenyield Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Greenyield Berhad grew its EBIT by 136% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Greenyield Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Greenyield 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.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Greenyield Berhad has net cash of RM1.58m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 136% over the last year. So we don't have any problem with Greenyield Berhad's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Greenyield Berhad that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.
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