Stock Analysis

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

KLSE:PRIVA
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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Privasia Technology Berhad (KLSE:PRIVA) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at 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 RM13.2m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of RM3.24m, its net debt is less, at about RM9.95m.

debt-equity-history-analysis
KLSE:PRIVA Debt to Equity History February 14th 2023

A Look At Privasia Technology Berhad's Liabilities

According to the last reported balance sheet, Privasia Technology Berhad had liabilities of RM22.3m due within 12 months, and liabilities of RM7.64m due beyond 12 months. Offsetting these obligations, it had cash of RM3.24m as well as receivables valued at RM24.3m due within 12 months. So its liabilities total RM2.37m more than the combination of its cash and short-term receivables.

Given Privasia Technology Berhad has a market capitalization of RM61.4m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. 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 RM35m, which is a fall of 17%. 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). Indeed, it lost RM3.4m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled RM7.6m in negative free cash flow over the last twelve months. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Privasia Technology Berhad (of which 1 shouldn't be ignored!) you should know about.

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.