Is G Capital Berhad (KLSE:GCAP) using too much debt?

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, G Capital Berhad (KLSE:GCAP) is in debt. But should shareholders worry about its use of debt?

When is debt a problem?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for G Capital Berhad

What is the debt of G Capital Berhad?

You can click on the graph below for historical figures, but it shows that in December 2021, G Capital Berhad had debt of RM21.1 million, an increase of RM4.34 million, on a year. However, he has RM52.6 million in cash to offset this, resulting in a net cash of RM31.5 million.

KLSE: GCAP Debt to Equity History April 7, 2022

A look at the liabilities of G Capital Berhad

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. In return, he had RM52.6 million in cash and RM15.5 million in debt due within 12 months. Thus, he can boast of having RM29.7 million more liquid assets than total Passives.

This surplus suggests that G Capital Berhad is using debt in a way that seems both safe and prudent. Because he has a lot of assets, he is unlikely to have any problems with his lenders. In short, G Capital Berhad has clean cash, so it’s fair to say that it doesn’t have heavy leverage! The balance sheet is clearly the area to focus on when analyzing debt. But it is G Capital Berhad’s earnings that will influence the balance sheet going forward. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Over the past year, G Capital Berhad recorded a loss before interest and tax and actually reduced its revenue by 35% to RM7.5 million. To be honest, that doesn’t bode well.

So how risky is G Capital Berhad?

While G Capital Berhad lost money in earnings before interest and tax (EBIT), it actually recorded a paper profit of RM1.2 million. So if you consider it has net cash, plus statutory earnings, the stock probably isn’t as risky as it looks, at least in the short term. We will feel more comfortable with the stock once EBIT is positive, given the weak revenue growth. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 4 warning signs for G Capital Berhad (1 is potentially serious!) which you should be aware of before investing here.

If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

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.

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