Greatech Technology Berhad (KLSE:GREATEC) Seems To Use Debt Quite Sensibly

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.' 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. 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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

What Is Greatech Technology Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Greatech Technology Berhad had RM14.7m of debt in March 2023, down from RM15.8m, one year before. However, it does have RM143.0m in cash offsetting this, leading to net cash of RM128.3m.

How Strong Is Greatech Technology Berhad's Balance Sheet?

The latest balance sheet data shows that Greatech Technology Berhad had liabilities of RM335.9m due within a year, and liabilities of RM26.0m falling due after that. Offsetting these obligations, it had cash of RM143.0m as well as receivables valued at RM400.5m due within 12 months. So it can boast RM181.6m more liquid assets than total liabilities.

This surplus suggests that Greatech Technology Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

The good news is that Greatech Technology Berhad has increased its EBIT by 2.5% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Greatech Technology Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Looking at the most recent three years, Greatech Technology Berhad recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Greatech Technology Berhad has net cash of RM128.3m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 2.5% in the last twelve months. So we are not troubled with Greatech Technology Berhad's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Greatech Technology Berhad has 1 warning sign we think you should be aware of.

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.