Baker Technology (SGX:BTP) Seems To Use Debt Rather Sparingly

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 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. We note that Baker Technology Limited (SGX:BTP) 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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Baker Technology

What Is Baker Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Baker Technology had S$12.4m of debt in December 2021, down from S$14.1m, one year before. But on the other hand it also has S$60.0m in cash, leading to a S$47.6m net cash position.

How Healthy Is Baker Technology's Balance Sheet?

The latest balance sheet data shows that Baker Technology had liabilities of S$22.9m due within a year, and liabilities of S$10.9m falling due after that. Offsetting this, it had S$60.0m in cash and S$34.5m in receivables that were due within 12 months. So it can boast S$60.7m more liquid assets than total liabilities.

This luscious liquidity implies that Baker Technology'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. Succinctly put, Baker Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Baker Technology made a loss at the EBIT level, last year, it was also good to see that it generated S$4.3m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Baker Technology 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Baker Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Baker Technology actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Baker Technology has net cash of S$47.6m, as well as more liquid assets than liabilities. The cherry on top was that in converted 218% of that EBIT to free cash flow, bringing in S$9.4m. So we don't think Baker Technology's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Baker Technology you should know about.

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.