Is G Capital Berhad (KLSE:GCAP) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, G Capital Berhad (KLSE:GCAP) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for G Capital Berhad

What Is G Capital Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 G Capital Berhad had debt of RM13.2m, up from RM2.16m in one year. But on the other hand it also has RM55.9m in cash, leading to a RM42.7m net cash position.

A Look At G Capital Berhad's Liabilities

According to the last reported balance sheet, G Capital Berhad had liabilities of RM6.99m due within 12 months, and liabilities of RM18.7m due beyond 12 months. Offsetting this, it had RM55.9m in cash and RM9.67m in receivables that were due within 12 months. So it can boast RM39.9m more liquid assets than total liabilities.

It's good to see that G Capital Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that G Capital Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since G Capital 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 G Capital Berhad had a loss before interest and tax, and actually shrunk its revenue by 42%, to RM6.9m. To be frank that doesn't bode well.

So How Risky Is G Capital Berhad?

Although G Capital Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of RM1.1m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. To that end, you should learn about the 5 warning signs we've spotted with G Capital Berhad (including 1 which is a bit concerning) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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