These 4 Measures Indicate That Notion VTec Berhad (KLSE:NOTION) Is Using Debt Reasonably Well

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 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?

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. 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.

See our latest analysis for Notion VTec Berhad

How Much Debt Does Notion VTec Berhad Carry?

As you can see below, at the end of June 2024, Notion VTec Berhad had RM27.0m of debt, up from RM17.1m a year ago. Click the image for more detail. But it also has RM52.8m in cash to offset that, meaning it has RM25.8m net cash.

How Strong Is Notion VTec Berhad's Balance Sheet?

According to the last reported balance sheet, Notion VTec Berhad had liabilities of RM98.8m due within 12 months, and liabilities of RM37.5m due beyond 12 months. Offsetting this, it had RM52.8m in cash and RM164.1m in receivables that were due within 12 months. So it can boast RM80.6m 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!

Notably, Notion VTec Berhad made a loss at the EBIT level, last year, but improved that to positive EBIT of RM6.4m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Notion VTec Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Notion VTec 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 year, Notion VTec Berhad actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Notion VTec Berhad has net cash of RM25.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM23m, being 352% of its EBIT. So we don't think Notion VTec Berhad's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Notion VTec Berhad is showing 1 warning sign in our investment analysis , you should know about...

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. 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.

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