RGT Berhad (KLSE:RGTBHD) Has A Rock Solid Balance Sheet

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 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. Importantly, RGT Berhad (KLSE:RGTBHD) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for RGT Berhad

What Is RGT Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 RGT Berhad had RM10.7m of debt, an increase on RM4.12m, over one year. However, it does have RM58.5m in cash offsetting this, leading to net cash of RM47.9m.

How Strong Is RGT Berhad's Balance Sheet?

According to the last reported balance sheet, RGT Berhad had liabilities of RM29.1m due within 12 months, and liabilities of RM17.4m due beyond 12 months. Offsetting this, it had RM58.5m in cash and RM24.2m in receivables that were due within 12 months. So it actually has RM36.2m 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!

Even more impressive was the fact that RGT Berhad grew its EBIT by 129% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since RGT Berhad will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. During the last three years, RGT Berhad produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case RGT Berhad has RM47.9m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 129% over the last year. So we don't think RGT Berhad's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - RGT Berhad has 2 warning signs we think you should be aware of.

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. 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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