Is G Capital Berhad (KLSE:GCAP) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, G Capital Berhad (KLSE:GCAP) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for G Capital Berhad

How Much Debt Does G Capital Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 G Capital Berhad had RM21.1m of debt, an increase on RM4.34m, over one year. However, it does have RM52.6m in cash offsetting this, leading to net cash of RM31.5m.

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 RM14.5m due within 12 months and liabilities of RM24.0m due beyond that. Offsetting this, it had RM52.6m in cash and RM15.5m in receivables that were due within 12 months. So it can boast RM29.7m more liquid assets than total liabilities.

This surplus suggests that G Capital Berhad is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, G Capital Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is G Capital 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.

In the last year G Capital Berhad had a loss before interest and tax, and actually shrunk its revenue by 35%, to RM7.5m. To be frank that doesn't bode well.

So How Risky Is G Capital Berhad?

While G Capital Berhad lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of RM1.2m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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, we've discovered 4 warning signs for G Capital Berhad (1 is potentially serious!) that you should be aware of before investing here.

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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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.