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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Greatech Technology Berhad (KLSE:GREATEC) does have debt on its balance sheet. 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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Greatech Technology Berhad

What Is Greatech Technology Berhad's Debt?

The image below, which you can click on for greater detail, shows that Greatech Technology Berhad had debt of RM15.3m at the end of September 2022, a reduction from RM16.4m over a year. But on the other hand it also has RM82.9m in cash, leading to a RM67.6m net cash position.

A Look At Greatech Technology Berhad's Liabilities

The latest balance sheet data shows that Greatech Technology Berhad had liabilities of RM171.1m due within a year, and liabilities of RM26.4m falling due after that. On the other hand, it had cash of RM82.9m and RM179.3m worth of receivables due within a year. So it can boast RM64.8m more liquid assets than total liabilities.

This state of affairs indicates that Greatech Technology Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the RM6.10b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

But the bad news is that Greatech Technology Berhad has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. 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, 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. Looking at the most recent three years, Greatech Technology Berhad recorded free cash flow of 29% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Greatech Technology Berhad has RM67.6m in net cash and a decent-looking balance sheet. So we don't have any problem with Greatech Technology Berhad's use of debt. 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.