GHL Systems Berhad (KLSE:GHLSYS) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 GHL Systems Berhad (KLSE:GHLSYS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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 GHL Systems Berhad

What Is GHL Systems Berhad's Net Debt?

As you can see below, GHL Systems Berhad had RM31.1m of debt at March 2022, down from RM58.9m a year prior. But on the other hand it also has RM225.6m in cash, leading to a RM194.5m net cash position.

A Look At GHL Systems Berhad's Liabilities

According to the last reported balance sheet, GHL Systems Berhad had liabilities of RM175.4m due within 12 months, and liabilities of RM28.6m due beyond 12 months. Offsetting these obligations, it had cash of RM225.6m as well as receivables valued at RM160.7m due within 12 months. So it actually has RM182.4m more liquid assets than total liabilities.

This short term liquidity is a sign that GHL Systems Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that GHL Systems Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, GHL Systems Berhad grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if GHL Systems 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. GHL Systems 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, GHL Systems Berhad recorded free cash flow worth 75% 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 it is always sensible to investigate a company's debt, in this case GHL Systems Berhad has RM194.5m in net cash and a decent-looking balance sheet. And we liked the look of last year's 26% year-on-year EBIT growth. So we don't think GHL Systems Berhad's use of debt is risky. 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. Be aware that GHL Systems Berhad is showing 1 warning sign in our investment analysis , you should know about...

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.