Globaltec Formation Berhad (KLSE:GLOTEC) Seems To Use Debt Quite Sensibly

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. We note that Globaltec Formation Berhad (KLSE:GLOTEC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Globaltec Formation Berhad

How Much Debt Does Globaltec Formation Berhad Carry?

The image below, which you can click on for greater detail, shows that Globaltec Formation Berhad had debt of RM14.3m at the end of March 2021, a reduction from RM21.5m over a year. But it also has RM80.4m in cash to offset that, meaning it has RM66.1m net cash.

A Look At Globaltec Formation Berhad's Liabilities

The latest balance sheet data shows that Globaltec Formation Berhad had liabilities of RM77.2m due within a year, and liabilities of RM13.9m falling due after that. Offsetting this, it had RM80.4m in cash and RM35.1m in receivables that were due within 12 months. So it can boast RM24.4m more liquid assets than total liabilities.

This surplus suggests that Globaltec Formation Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Globaltec Formation Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Globaltec Formation Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM29m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Globaltec Formation 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. Globaltec Formation 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. Looking at the most recent year, Globaltec Formation Berhad recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Globaltec Formation Berhad has net cash of RM66.1m, as well as more liquid assets than liabilities. So we are not troubled with Globaltec Formation Berhad's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Globaltec Formation Berhad .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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