Is Genetec Technology Berhad (KLSE:GENETEC) Using Debt In A Risky Way?

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. We can see that Genetec Technology Berhad (KLSE:GENETEC) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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 at March 2021 Genetec Technology Berhad had debt of RM16.2m, up from RM13.8m in one year. However, it does have RM43.4m in cash offsetting this, leading to net cash of RM27.2m.

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 RM30.6m falling due within a year, and liabilities of RM9.55m due beyond that. Offsetting this, it had RM43.4m in cash and RM24.5m in receivables that were due within 12 months. So it actually has RM27.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Genetec Technology Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Genetec Technology Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Genetec Technology 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.

In the last year Genetec Technology Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to RM97m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Genetec Technology Berhad?

Although Genetec Technology Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM16m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 21% is a good sign. We'd see further strong growth as an optimistic indication. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Genetec Technology Berhad (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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. 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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