Here's Why Notion VTec Berhad (KLSE:NOTION) Can Manage Its Debt Responsibly

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 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. Importantly, Notion VTec Berhad (KLSE:NOTION) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Notion VTec Berhad

What Is Notion VTec Berhad's Net Debt?

As you can see below, Notion VTec Berhad had RM10.3m of debt at September 2024, down from RM33.3m a year prior. However, it does have RM61.4m in cash offsetting this, leading to net cash of RM51.1m.

How Strong Is Notion VTec Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Notion VTec Berhad had liabilities of RM122.6m due within 12 months and liabilities of RM34.1m due beyond that. Offsetting this, it had RM61.4m in cash and RM168.2m in receivables that were due within 12 months. So it actually has RM72.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Notion VTec Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Notion VTec Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Notion VTec Berhad turned things around in the last 12 months, delivering and EBIT of RM62m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Notion VTec Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Notion VTec Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last year, Notion VTec Berhad's free cash flow amounted to 26% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Notion VTec Berhad has RM51.1m in net cash and a decent-looking balance sheet. So we don't have any problem with Notion VTec Berhad's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Notion VTec Berhad you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.