Stock Analysis

Is Privasia Technology Berhad (KLSE:PRIVA) Using Too Much Debt?

KLSE:PRIVA
Source: Shutterstock

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. As with many other companies Privasia Technology Berhad (KLSE:PRIVA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Privasia Technology Berhad

What Is Privasia Technology Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Privasia Technology Berhad had RM12.9m in debt in June 2022; about the same as the year before. However, because it has a cash reserve of RM3.11m, its net debt is less, at about RM9.83m.

debt-equity-history-analysis
KLSE:PRIVA Debt to Equity History October 20th 2022

How Healthy Is Privasia Technology Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Privasia Technology Berhad had liabilities of RM21.3m due within 12 months and liabilities of RM10.1m due beyond that. On the other hand, it had cash of RM3.11m and RM22.9m worth of receivables due within a year. So its liabilities total RM5.37m more than the combination of its cash and short-term receivables.

Given Privasia Technology Berhad has a market capitalization of RM64.5m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Privasia Technology Berhad made a loss at the EBIT level, and saw its revenue drop to RM36m, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

Not only did Privasia Technology Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at RM5.3m. 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 RM8.7m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Privasia Technology Berhad (including 2 which are a bit concerning) .

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.

View the Free Analysis

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.