These 4 Measures Indicate That Greatech Technology Berhad (KLSE:GREATEC) Is Using Debt Reasonably Well

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Greatech Technology Berhad (KLSE:GREATEC) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 RM12.8m of debt in December 2024, down from RM14.5m, one year before. However, it does have RM232.8m in cash offsetting this, leading to net cash of RM220.0m.

A Look At Greatech Technology Berhad's Liabilities

The latest balance sheet data shows that Greatech Technology Berhad had liabilities of RM171.5m due within a year, and liabilities of RM31.5m falling due after that. Offsetting these obligations, it had cash of RM232.8m as well as receivables valued at RM314.5m due within 12 months. So it can boast RM344.3m 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.

And we also note warmly that Greatech Technology Berhad grew its EBIT by 20% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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. Considering the last three years, Greatech Technology Berhad actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Greatech Technology Berhad has net cash of RM220.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 20% year-on-year EBIT growth. So we don't have any problem with Greatech Technology Berhad's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Greatech Technology Berhad's earnings per share history for free.

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. 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.