Is SMTrack Berhad (KLSE:SMTRACK) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that SMTrack Berhad ( KLSE:SMTRACK ) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

What Is SMTrack Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that SMTrack Berhad had RM9.05m of debt in December 2024, down from RM16.9m, one year before. However, because it has a cash reserve of RM7.35m, its net debt is less, at about RM1.70m.

How Strong Is SMTrack Berhad's Balance Sheet?

The latest balance sheet data shows that SMTrack Berhad had liabilities of RM3.98m due within a year, and liabilities of RM18.7m falling due after that. On the other hand, it had cash of RM7.35m and -RM1.85m worth of receivables due within a year. So its liabilities total RM17.1m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of RM13.2m, we think shareholders really should watch SMTrack Berhad's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SMTrack Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot .

Check out our latest analysis for SMTrack Berhad

Over 12 months, SMTrack Berhad made a loss at the EBIT level, and saw its revenue drop to RM11m, which is a fall of 49%. That makes us nervous, to say the least.

Caveat Emptor

While SMTrack Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping RM36m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of RM27m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example SMTrack Berhad has 4 warning signs (and 3 which shouldn't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.