ITMAX System Berhad (KLSE:ITMAX) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies ITMAX System Berhad (KLSE:ITMAX) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for ITMAX System Berhad

How Much Debt Does ITMAX System Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that ITMAX System Berhad had RM51.5m of debt in March 2024, down from RM69.9m, one year before. But it also has RM197.2m in cash to offset that, meaning it has RM145.7m net cash.

How Healthy Is ITMAX System Berhad's Balance Sheet?

The latest balance sheet data shows that ITMAX System Berhad had liabilities of RM58.6m due within a year, and liabilities of RM45.6m falling due after that. Offsetting these obligations, it had cash of RM197.2m as well as receivables valued at RM77.4m due within 12 months. So it can boast RM170.5m more liquid assets than total liabilities.

This short term liquidity is a sign that ITMAX System Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that ITMAX System Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, ITMAX System Berhad grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if ITMAX System Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ITMAX System 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 three years, ITMAX System Berhad reported free cash flow worth 11% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case ITMAX System Berhad has RM145.7m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 21% over the last year. So we are not troubled with ITMAX System Berhad's debt use. 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. For instance, we've identified 1 warning sign for ITMAX System Berhad that you should be aware of.

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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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.