Stock Analysis

G Capital Berhad (KLSE:GCAP) Is Making Moderate Use Of Debt

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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 note that G Capital Berhad (KLSE:GCAP) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

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How Much Debt Does G Capital Berhad Carry?

As you can see below, at the end of December 2022, G Capital Berhad had RM47.5m of debt, up from RM23.4m a year ago. Click the image for more detail. However, it does have RM34.4m in cash offsetting this, leading to net debt of about RM13.2m.

KLSE:GCAP Debt to Equity History March 19th 2023

A Look At G Capital Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that G Capital Berhad had liabilities of RM21.5m due within 12 months and liabilities of RM48.4m due beyond that. Offsetting these obligations, it had cash of RM34.4m as well as receivables valued at RM13.1m due within 12 months. So it has liabilities totalling RM22.4m more than its cash and near-term receivables, combined.

Since publicly traded G Capital Berhad shares are worth a total of RM133.1m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since G Capital Berhad will need earnings to service that debt. 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.

Over 12 months, G Capital Berhad reported revenue of RM27m, which is a gain of 258%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, G Capital Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM4.4m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM31m in negative free cash flow over the last twelve months. So in short it's a really 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 G Capital Berhad has 3 warning signs (and 2 which are a bit concerning) 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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