Stock Analysis

Here's Why Privasia Technology Berhad (KLSE:PRIVA) Can Afford Some Debt

KLSE:PRIVA
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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 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 Privasia Technology Berhad (KLSE:PRIVA) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Privasia Technology Berhad

What Is Privasia Technology Berhad's Net Debt?

As you can see below, Privasia Technology Berhad had RM12.4m of debt at December 2021, down from RM15.6m a year prior. However, it does have RM6.96m in cash offsetting this, leading to net debt of about RM5.47m.

debt-equity-history-analysis
KLSE:PRIVA Debt to Equity History March 23rd 2022

A Look At Privasia Technology Berhad's Liabilities

According to the last reported balance sheet, Privasia Technology Berhad had liabilities of RM17.0m due within 12 months, and liabilities of RM6.17m due beyond 12 months. On the other hand, it had cash of RM6.96m and RM17.7m worth of receivables due within a year. So it actually has RM1.53m more liquid assets than total liabilities.

This surplus suggests that Privasia Technology Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. When analysing debt levels, the balance sheet is the obvious place to start. But it is Privasia Technology Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Privasia Technology Berhad had a loss before interest and tax, and actually shrunk its revenue by 2.4%, to RM41m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Privasia Technology Berhad produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at RM1.7m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. 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 instance, we've identified 3 warning signs for Privasia Technology Berhad (1 doesn't sit too well with us) 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.

Valuation is complex, but we're helping make it simple.

Find out whether Privasia Technology Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.