We Think OpenSys (M) Berhad (KLSE:OPENSYS) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 OpenSys (M) Berhad (KLSE:OPENSYS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for OpenSys (M) Berhad

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

As you can see below, OpenSys (M) Berhad had RM8.90m of debt at March 2021, down from RM9.84m a year prior. However, it does have RM35.8m in cash offsetting this, leading to net cash of RM26.9m.

A Look At OpenSys (M) Berhad's Liabilities

The latest balance sheet data shows that OpenSys (M) Berhad had liabilities of RM26.2m due within a year, and liabilities of RM14.2m falling due after that. Offsetting this, it had RM35.8m in cash and RM19.6m in receivables that were due within 12 months. So it actually has RM15.0m 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 2.4% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is OpenSys (M) 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. OpenSys (M) 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. During the last three years, OpenSys (M) Berhad generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that OpenSys (M) Berhad has net cash of RM26.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in RM26m. So we don't think OpenSys (M) Berhad's use of debt is risky. 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. Case in point: We've spotted 3 warning signs for OpenSys (M) Berhad you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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