Is Greatech Technology Berhad (KLSE:GREATEC) A Risky Investment?

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. As with many other companies Greatech Technology Berhad (KLSE:GREATEC) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Greatech Technology Berhad

What Is Greatech Technology Berhad's Net Debt?

As you can see below, Greatech Technology Berhad had RM15.0m of debt at December 2022, down from RM16.1m a year prior. But on the other hand it also has RM326.7m in cash, leading to a RM311.6m net cash position.

A Look At Greatech Technology Berhad's Liabilities

The latest balance sheet data shows that Greatech Technology Berhad had liabilities of RM333.6m due within a year, and liabilities of RM26.4m falling due after that. Offsetting these obligations, it had cash of RM326.7m as well as receivables valued at RM306.6m due within 12 months. So it can boast RM273.2m 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. Succinctly put, Greatech Technology Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Greatech Technology Berhad has seen its EBIT plunge 13% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. 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'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. 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. Over the most recent three years, Greatech Technology Berhad recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Greatech Technology Berhad has net cash of RM311.6m, as well as more liquid assets than liabilities. So we don't have any problem with Greatech Technology Berhad's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Greatech Technology Berhad (of which 1 is concerning!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.