Stock Analysis

Is Privasia Technology Berhad (KLSE:PRIVA) A Risky Investment?

KLSE:PRIVA
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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.' 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. As with many other companies Privasia Technology Berhad (KLSE:PRIVA) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Privasia Technology Berhad

What Is Privasia Technology Berhad's Debt?

As you can see below, Privasia Technology Berhad had RM12.8m of debt at March 2022, down from RM13.8m a year prior. However, it does have RM6.84m in cash offsetting this, leading to net debt of about RM5.91m.

debt-equity-history-analysis
KLSE:PRIVA Debt to Equity History July 7th 2022

How Healthy Is Privasia Technology Berhad's Balance Sheet?

The latest balance sheet data shows that Privasia Technology Berhad had liabilities of RM21.5m due within a year, and liabilities of RM7.98m falling due after that. On the other hand, it had cash of RM6.84m and RM20.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM2.05m.

Of course, Privasia Technology Berhad has a market capitalization of RM46.1m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Privasia Technology Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Privasia Technology Berhad had a loss before interest and tax, and actually shrunk its revenue by 5.3%, to RM39m. We would much prefer see growth.

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 RM4.2m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through RM813k of cash over the last year. So to be blunt we think it is risky. 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 2 warning signs for Privasia Technology Berhad that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.