Is Feytech Holdings Berhad (KLSE:FEYTECH) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Feytech Holdings Berhad (KLSE:FEYTECH) does carry debt. But the real question is whether this debt is making the company risky.

We've discovered 2 warning signs about Feytech Holdings Berhad. View them for free.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Feytech Holdings Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Feytech Holdings Berhad had RM17.3m of debt in December 2024, down from RM18.1m, one year before. But on the other hand it also has RM146.5m in cash, leading to a RM129.2m net cash position.

How Strong Is Feytech Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Feytech Holdings Berhad had liabilities of RM25.9m due within 12 months, and liabilities of RM53.6m due beyond 12 months. Offsetting these obligations, it had cash of RM146.5m as well as receivables valued at RM37.4m due within 12 months. So it can boast RM104.5m more liquid assets than total liabilities.

This excess liquidity suggests that Feytech Holdings Berhad is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Feytech Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Feytech Holdings Berhad

Fortunately, Feytech Holdings Berhad grew its EBIT by 4.1% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Feytech Holdings Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Feytech Holdings Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Feytech Holdings Berhad recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Feytech Holdings Berhad has net cash of RM129.2m, as well as more liquid assets than liabilities. And it also grew its EBIT by 4.1% over the last year. So we don't think Feytech Holdings Berhad's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Feytech Holdings Berhad has 2 warning signs (and 1 which shouldn't be ignored) we think 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.