mTouche Technology Berhad (KLSE:MTOUCHE) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

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.' 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 mTouche Technology Berhad (KLSE:MTOUCHE) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for mTouche Technology Berhad

What Is mTouche Technology Berhad's Net Debt?

As you can see below, at the end of June 2024, mTouche Technology Berhad had RM9.59m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has RM51.8m in cash, leading to a RM42.2m net cash position.

How Strong Is mTouche Technology Berhad's Balance Sheet?

We can see from the most recent balance sheet that mTouche Technology Berhad had liabilities of RM16.6m falling due within a year, and liabilities of RM10.2m due beyond that. On the other hand, it had cash of RM51.8m and RM14.5m worth of receivables due within a year. So it actually has RM39.5m more liquid assets than total liabilities.

This luscious liquidity implies that mTouche Technology Berhad's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that mTouche Technology Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since mTouche Technology 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.

In the last year mTouche Technology Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 78%, to RM17m. With any luck the company will be able to grow its way to profitability.

So How Risky Is mTouche Technology Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year mTouche Technology Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM17m and booked a RM58m accounting loss. But the saving grace is the RM42.2m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, mTouche Technology Berhad may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. For example mTouche Technology Berhad has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

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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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.