RGT Berhad (KLSE:RGTBHD) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies RGT Berhad (KLSE:RGTBHD) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for RGT Berhad

How Much Debt Does RGT Berhad Carry?

As you can see below, at the end of March 2021, RGT Berhad had RM17.9m of debt, up from RM3.76m a year ago. Click the image for more detail. But it also has RM54.6m in cash to offset that, meaning it has RM36.6m net cash.

How Strong Is RGT Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that RGT Berhad had liabilities of RM16.8m due within 12 months and liabilities of RM22.6m due beyond that. Offsetting this, it had RM54.6m in cash and RM21.2m in receivables that were due within 12 months. So it actually has RM36.4m more liquid assets than total liabilities.

This surplus suggests that RGT Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, RGT Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, RGT Berhad grew its EBIT by 259% 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 RGT 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. RGT Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, RGT Berhad's free cash flow amounted to 40% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case RGT Berhad has RM36.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 259% year-on-year EBIT growth. So we don't think RGT Berhad's use of debt is risky. 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 learn about the 4 warning signs we've spotted with RGT Berhad (including 1 which can't be ignored) .

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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