Is OpenSys (M) Berhad (KLSE:OPENSYS) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that OpenSys (M) Berhad (KLSE:OPENSYS) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for OpenSys (M) Berhad

What Is OpenSys (M) Berhad's Net Debt?

As you can see below, OpenSys (M) Berhad had RM9.15m of debt at December 2020, down from RM11.5m a year prior. However, it does have RM31.3m in cash offsetting this, leading to net cash of RM22.2m.

A Look At OpenSys (M) Berhad's Liabilities

According to the last reported balance sheet, OpenSys (M) Berhad had liabilities of RM14.9m due within 12 months, and liabilities of RM14.5m due beyond 12 months. On the other hand, it had cash of RM31.3m and RM11.4m worth of receivables due within a year. So it can boast RM13.4m more liquid assets than total liabilities.

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

But the other side of the story is that OpenSys (M) Berhad saw its EBIT decline by 9.3% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is OpenSys (M) Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While OpenSys (M) 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. Over the last three years, OpenSys (M) Berhad actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case OpenSys (M) Berhad has RM22.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM22m, being 103% of its EBIT. So is OpenSys (M) Berhad's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for OpenSys (M) 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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