Here's Why Genetec Technology Berhad (KLSE:GENETEC) Can Manage Its Debt Responsibly

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. We can see that Genetec Technology Berhad (KLSE:GENETEC) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for Genetec Technology Berhad

What Is Genetec Technology Berhad's Debt?

The image below, which you can click on for greater detail, shows that Genetec Technology Berhad had debt of RM14.8m at the end of June 2024, a reduction from RM48.4m over a year. However, its balance sheet shows it holds RM164.4m in cash, so it actually has RM149.6m net cash.

How Healthy Is Genetec Technology Berhad's Balance Sheet?

We can see from the most recent balance sheet that Genetec Technology Berhad had liabilities of RM62.1m falling due within a year, and liabilities of RM8.84m due beyond that. On the other hand, it had cash of RM164.4m and RM236.9m worth of receivables due within a year. So it actually has RM330.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Genetec Technology Berhad's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Genetec Technology Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Genetec Technology Berhad has seen its EBIT plunge 12% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Genetec Technology Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Genetec Technology 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. Considering the last three years, Genetec Technology Berhad actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Genetec Technology Berhad has RM149.6m in net cash and a decent-looking balance sheet. So we are not troubled with Genetec Technology Berhad's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Genetec Technology Berhad .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.