Greatech Technology Berhad (KLSE:GREATEC) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Greatech Technology Berhad (KLSE:GREATEC) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Greatech Technology Berhad

How Much Debt Does Greatech Technology Berhad Carry?

As you can see below, Greatech Technology Berhad had RM18.3m of debt at March 2021, down from RM19.5m a year prior. However, its balance sheet shows it holds RM319.3m in cash, so it actually has RM301.1m net cash.

How Healthy Is Greatech Technology Berhad's Balance Sheet?

The latest balance sheet data shows that Greatech Technology Berhad had liabilities of RM206.8m due within a year, and liabilities of RM27.2m falling due after that. Offsetting this, it had RM319.3m in cash and RM142.8m in receivables that were due within 12 months. So it actually has RM228.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Greatech Technology Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

Better yet, Greatech Technology Berhad grew its EBIT by 105% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Greatech 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Greatech 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. Over the last three years, Greatech Technology Berhad actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Greatech Technology Berhad has RM301.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM90m, being 153% of its EBIT. So is Greatech Technology Berhad's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Greatech Technology Berhad that you should be aware of.

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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