Is Green Packet Berhad (KLSE:GPACKET) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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 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 RM13.5m at the end of June 2023, a reduction from RM14.8m over a year. However, its balance sheet shows it holds RM18.3m in cash, so it actually has RM4.81m net cash.

How Healthy Is Green Packet Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Green Packet Berhad had liabilities of RM209.5m due within 12 months and liabilities of RM3.22m due beyond that. Offsetting these obligations, it had cash of RM18.3m as well as receivables valued at RM226.1m due within 12 months. So it can boast RM31.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that Green Packet Berhad's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Green Packet Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Green Packet Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Green Packet Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 5.8%, to RM602m. We usually like to see faster growth from unprofitable companies, but each to their own.

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 RM44m and booked a RM36m accounting loss. But at least it has RM4.81m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 5 warning signs with Green Packet Berhad (at least 2 which are significant) , and understanding them should be part of your investment process.

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.