Fascinating technology

Does Genetec Technology Berhad (KLSE: GENETEC) have a healthy balance sheet?

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Genetec Berhad Technology (KLSE: GENETEC) is in debt. But should shareholders worry about its use of debt?

What risk does debt carry?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Check out our latest analysis for Genetec Technology Berhad

What is Genetec Technology Berhad’s debt?

You can click on the graph below for historical figures, but it shows that in June 2022, Genetec Technology Berhad had debt of RM81.6 million, an increase of RM29.5 million, on a year. However, he has RM25.4 million in cash to offset this, resulting in a net debt of around RM56.2 million.

KLSE: GENETEC Debt to Equity History November 17, 2022

How healthy is Genetec Technology Berhad’s balance sheet?

We can see from the most recent balance sheet that Genetec Technology Berhad had liabilities of RM113.6m due within one year, and liabilities of RM9.86m due beyond. As compensation for these obligations, it had cash of RM25.4 million as well as receivables valued at RM197.0 million due within 12 months. So he actually has RM99.0m After liquid assets than total liabilities.

This short-term liquidity is a sign that Genetec Technology Berhad could probably repay its debt easily, as its balance sheet is far from stretched.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Genetec Technology Berhad has a low net debt to EBITDA ratio of just 0.70. And its EBIT covers its interest charges 31.6 times. So we’re pretty relaxed about his super-conservative use of debt. Even better, Genetec Technology Berhad increased its EBIT by 1,131% last year, which is an impressive improvement. This boost will make it even easier to pay off debt in the future. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Genetec Technology Berhad’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past two years, Genetec Technology Berhad has burned a lot of money. While this may be the result of spending for growth, it makes debt much riskier.

Our point of view

Interest coverage from Genetec Technology Berhad suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. But we have to admit that we see that converting it from EBIT to free cash flow has the opposite effect. When we consider the range of factors above, it seems that Genetec Technology Berhad is quite sensitive with its use of debt. This means they take on a bit more risk, hoping to increase shareholder returns. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. To this end, you should be aware of the 1 warning sign we spotted with Genetec Technology Berhad.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

Valuation is complex, but we help make it simple.

Find out if Genetec Berhad Technology is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.