Does Greatech Technology Berhad (KLSE:GREATEC) Have A Healthy 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Greatech Technology Berhad (KLSE:GREATEC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View our latest analysis for Greatech Technology Berhad

How Much Debt Does Greatech Technology Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Greatech Technology Berhad had RM16.4m of debt in September 2021, down from RM19.0m, one year before. However, it does have RM85.6m in cash offsetting this, leading to net cash of RM69.2m.

How Healthy Is Greatech Technology Berhad's Balance Sheet?

The latest balance sheet data shows that Greatech Technology Berhad had liabilities of RM196.3m due within a year, and liabilities of RM25.1m falling due after that. On the other hand, it had cash of RM85.6m and RM143.3m worth of receivables due within a year. So it can boast RM7.50m more liquid assets than total liabilities.

This state of affairs indicates that Greatech Technology Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the RM8.14b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Greatech Technology Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Greatech Technology Berhad has boosted its EBIT by 79%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Greatech Technology Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Greatech Technology 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. Happily for any shareholders, Greatech Technology Berhad actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Greatech Technology Berhad has RM69.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM128m, being 103% of its EBIT. So is Greatech Technology Berhad's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Greatech Technology Berhad, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.