Stock Analysis

Privasia Technology Berhad (KLSE:PRIVA) Is Carrying A Fair Bit Of Debt

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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 Privasia Technology Berhad (KLSE:PRIVA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Privasia Technology Berhad

What Is Privasia Technology Berhad's Debt?

The image below, which you can click on for greater detail, shows that Privasia Technology Berhad had debt of RM13.0m at the end of September 2021, a reduction from RM18.3m over a year. However, it does have RM7.27m in cash offsetting this, leading to net debt of about RM5.72m.

KLSE:PRIVA Debt to Equity History November 26th 2021

How Healthy Is Privasia Technology Berhad's Balance Sheet?

The latest balance sheet data shows that Privasia Technology Berhad had liabilities of RM22.1m due within a year, and liabilities of RM6.61m falling due after that. On the other hand, it had cash of RM7.27m and RM21.3m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Privasia Technology Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the RM61.4m company is short on cash, but still worth keeping an eye on the balance sheet. 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.

In the last year Privasia Technology Berhad's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Privasia Technology Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost RM3.5m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled RM2.3m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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 4 warning signs for Privasia Technology Berhad (1 shouldn't be ignored) you should be aware of.

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.

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.

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