Stock Analysis

These 4 Measures Indicate That Privasia Technology Berhad (KLSE:PRIVA) Is Using Debt Reasonably Well

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. As with many other companies Privasia Technology Berhad (KLSE:PRIVA) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Privasia Technology Berhad

How Much Debt Does Privasia Technology Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Privasia Technology Berhad had RM13.3m of debt in March 2021, down from RM17.1m, one year before. However, it does have RM11.6m in cash offsetting this, leading to net debt of about RM1.75m.

debt-equity-history-analysis
KLSE:PRIVA Debt to Equity History May 27th 2021

A Look At Privasia Technology Berhad's Liabilities

We can see from the most recent balance sheet that Privasia Technology Berhad had liabilities of RM17.9m falling due within a year, and liabilities of RM7.55m due beyond that. Offsetting this, it had RM11.6m in cash and RM16.1m in receivables that were due within 12 months. So it can boast RM2.25m more liquid assets than total liabilities.

This state of affairs indicates that Privasia Technology Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the RM159.6m company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Privasia Technology Berhad has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Given net debt is only 0.24 times EBITDA, it is initially surprising to see that Privasia Technology Berhad's EBIT has low interest coverage of 0.088 times. So while we're not necessarily alarmed we think that its debt is far from trivial. We also note that Privasia Technology Berhad improved its EBIT from a last year's loss to a positive RM75k. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Privasia Technology Berhad actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

The good news is that Privasia Technology Berhad's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But we must concede we find its interest cover has the opposite effect. When we consider the range of factors above, it looks like Privasia Technology Berhad is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. 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 4 warning signs for Privasia Technology Berhad (of which 1 is potentially serious!) you should know about.

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.

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