We Think Privasia Technology Berhad (KLSE:PRIVA) Can Manage Its Debt With Ease

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Privasia Technology Berhad (KLSE:PRIVA) makes use of debt. But should shareholders be worried about its use of debt?

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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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Privasia Technology Berhad Carry?

The image below, which you can click on for greater detail, shows that Privasia Technology Berhad had debt of RM11.5m at the end of December 2024, a reduction from RM13.2m over a year. However, its balance sheet shows it holds RM19.1m in cash, so it actually has RM7.56m net cash.

How Strong Is Privasia Technology Berhad's Balance Sheet?

According to the last reported balance sheet, Privasia Technology Berhad had liabilities of RM83.0m due within 12 months, and liabilities of RM28.7m due beyond 12 months. Offsetting these obligations, it had cash of RM19.1m as well as receivables valued at RM84.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM7.98m.

Given Privasia Technology Berhad has a market capitalization of RM57.4m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Privasia Technology Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Privasia Technology Berhad

Importantly, Privasia Technology Berhad grew its EBIT by 60% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. Privasia Technology Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Privasia Technology Berhad actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Privasia Technology Berhad does have more liabilities than liquid assets, it also has net cash of RM7.56m. The cherry on top was that in converted 372% of that EBIT to free cash flow, bringing in RM50m. So we don't think Privasia Technology Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Privasia Technology Berhad .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.