Notion VTec Berhad (KLSE:NOTION) Is Making Moderate Use Of Debt

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 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. We can see that Notion VTec Berhad (KLSE:NOTION) does use debt in its business. 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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Notion VTec Berhad

How Much Debt Does Notion VTec Berhad Carry?

The image below, which you can click on for greater detail, shows that at September 2021 Notion VTec Berhad had debt of RM33.0m, up from RM27.2m in one year. However, because it has a cash reserve of RM25.0m, its net debt is less, at about RM7.99m.

A Look At Notion VTec Berhad's Liabilities

We can see from the most recent balance sheet that Notion VTec Berhad had liabilities of RM81.1m falling due within a year, and liabilities of RM48.2m due beyond that. Offsetting this, it had RM25.0m in cash and RM83.0m in receivables that were due within 12 months. So its liabilities total RM21.2m more than the combination of its cash and short-term receivables.

Of course, Notion VTec Berhad has a market capitalization of RM237.2m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 46%, to RM353m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Notion VTec Berhad managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost RM2.5m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM66m of cash over the last year. So in short it's a really risky stock. 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 3 warning signs with Notion VTec Berhad (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.

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.