Is Notion VTec Berhad (KLSE:NOTION) Using Debt Sensibly?

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. As with many other companies Notion VTec Berhad (KLSE:NOTION) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Notion VTec Berhad

What Is Notion VTec Berhad's Debt?

As you can see below, Notion VTec Berhad had RM28.1m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has RM40.8m in cash to offset that, meaning it has RM12.7m net cash.

How Healthy 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 RM51.8m due within 12 months and liabilities of RM57.5m due beyond that. Offsetting these obligations, it had cash of RM40.8m as well as receivables valued at RM88.2m due within 12 months. So it can boast RM19.7m more liquid assets than total liabilities.

This surplus suggests that Notion VTec Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Notion VTec Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Notion VTec Berhad's earnings that will influence how the balance sheet holds up in the future. 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 2.9%, to RM238m. We would much prefer see growth.

So How Risky Is Notion VTec 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 Notion VTec Berhad lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through RM26m of cash and made a loss of RM4.8m. Given it only has net cash of RM12.7m, the company may need to raise more capital if it doesn't reach break-even soon. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Notion VTec Berhad , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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