Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Greenyield Berhad (KLSE:GREENYB) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Greenyield Berhad Carry?
The image below, which you can click on for greater detail, shows that Greenyield Berhad had debt of RM12.2m at the end of December 2021, a reduction from RM13.6m over a year. However, its balance sheet shows it holds RM14.9m in cash, so it actually has RM2.66m net cash.
A Look At Greenyield Berhad's Liabilities
Zooming in on the latest balance sheet data, we can see that Greenyield Berhad had liabilities of RM6.12m due within 12 months and liabilities of RM13.3m due beyond that. Offsetting this, it had RM14.9m in cash and RM6.57m in receivables that were due within 12 months. So it actually has RM2.02m more liquid assets than total liabilities.
This state of affairs indicates that Greenyield Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the RM103.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Greenyield Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Greenyield Berhad grew its EBIT by 9.9% in the last year, making that debt load look even more manageable. 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent two years, Greenyield Berhad recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
While we empathize with investors who find debt concerning, you should keep in mind that Greenyield Berhad has net cash of RM2.66m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 9.9% in the last twelve months. So we are not troubled with Greenyield Berhad's debt use. 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 1 warning sign 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.