Is Green Packet Berhad (KLSE:GPACKET) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Green Packet Berhad (KLSE:GPACKET) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Green Packet Berhad

How Much Debt Does Green Packet Berhad Carry?

The image below, which you can click on for greater detail, shows that Green Packet Berhad had debt of RM9.57m at the end of September 2023, a reduction from RM14.9m over a year. However, its balance sheet shows it holds RM13.5m in cash, so it actually has RM3.89m net cash.

How Strong Is Green Packet Berhad's Balance Sheet?

According to the last reported balance sheet, Green Packet Berhad had liabilities of RM177.1m due within 12 months, and liabilities of RM3.25m due beyond 12 months. Offsetting this, it had RM13.5m in cash and RM193.2m in receivables that were due within 12 months. So it can boast RM26.3m more liquid assets than total liabilities.

This surplus suggests that Green Packet Berhad is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Green Packet Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Green Packet 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 Green Packet Berhad's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Green Packet Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Green Packet Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM40m and booked a RM31m accounting loss. With only RM3.89m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should learn about the 4 warning signs we've spotted with Green Packet Berhad (including 3 which are significant) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.