Is Notion VTec Berhad (KLSE:NOTION) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Notion VTec Berhad (KLSE:NOTION) 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. 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. 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.

View our latest analysis for Notion VTec Berhad

What Is Notion VTec Berhad's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Notion VTec Berhad had debt of RM43.8m, up from RM30.3m in one year. However, because it has a cash reserve of RM25.5m, its net debt is less, at about RM18.3m.

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 RM77.8m due within 12 months and liabilities of RM40.6m due beyond that. Offsetting this, it had RM25.5m in cash and RM115.3m in receivables that were due within 12 months. So it actually has RM22.3m 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Notion VTec 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 Notion VTec Berhad had a loss before interest and tax, and actually shrunk its revenue by 11%, to RM333m. We would much prefer see growth.

Caveat Emptor

Not only did Notion VTec Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM31m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. And on top of that, it booked free cash flow of RM33m and profit of RM5.2m over the last year. So it seems too risky for our taste. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Notion VTec Berhad is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.