We Think Greatech Technology Berhad (KLSE:GREATEC) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Greatech Technology Berhad

What Is Greatech Technology Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Greatech Technology Berhad had RM15.6m of debt in June 2022, down from RM16.5m, one year before. But it also has RM81.8m in cash to offset that, meaning it has RM66.2m net cash.

How Strong Is Greatech Technology Berhad's Balance Sheet?

The latest balance sheet data shows that Greatech Technology Berhad had liabilities of RM187.6m due within a year, and liabilities of RM26.6m falling due after that. Offsetting this, it had RM81.8m in cash and RM121.9m in receivables that were due within 12 months. So it has liabilities totalling RM10.5m more than its cash and near-term receivables, combined.

Having regard to Greatech Technology Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the RM4.28b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Greatech Technology Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Greatech Technology Berhad if management cannot prevent a repeat of the 28% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Greatech Technology Berhad produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Greatech Technology Berhad has RM66.2m in net cash. And it impressed us with free cash flow of -RM32m, being 76% of its EBIT. 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. For instance, we've identified 1 warning sign for Greatech Technology Berhad that you should be aware of.

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.