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Warren Buffett said: “Volatility is far from synonymous with risk”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Pan Malaysia Holdings Berhad (KLSE: PMHLDG) uses debt. But the real question is whether this debt makes the business risky.
When is Debt a Problem?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest review for Pan Malaysia Holdings Berhad
What is the net debt of Pan Malaysia Holdings Berhad?
The graph below, which you can click for more details, shows Pan Malaysia Holdings Berhad owed RM 14.5 million in debt as of September 2021; about the same as the year before. Net debt is about the same because it doesn’t have a lot of cash.
A look at the liabilities of Pan Malaysia Holdings Berhad
We can see from the most recent balance sheet that Pan Malaysia Holdings Berhad had liabilities of RM 9.01 million due within one year, and liabilities of RM 13.6 million due beyond. On the other hand, he had cash of RM220,000 and RM32.7 million of receivables due within one year. So he actually has RM10.3m Following liquid assets as total liabilities.
It is good to see that Pan Malaysia Holdings Berhad has a lot of liquidity on its balance sheet, which suggests prudent liability management. Because he has a lot of assets, he is unlikely to have any problems with his lenders. When analyzing debt levels, the balance sheet is the obvious place to start. But you can’t look at debt in isolation; since Pan Malaysia Holdings Berhad will need profits to pay off this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
In the past year, Pan Malaysia Holdings Berhad suffered a loss before interest and taxes and in fact reduced its income by 74%, to RM1.5 million. To be frank, that doesn’t bode well.
Emptor Warning
Pan Malaysia Holdings Berhad’s revenue not only declined over the past twelve months, but also produced negative earnings before interest and taxes (EBIT). To be precise, the EBIT loss amounted to RM 2.1 million. On a brighter note, the company has liquid assets, so it has some time to improve its operations before debt becomes a serious problem. But we would like to see positive free cash flow before we spend a lot of time trying to figure out the headline. This one is a bit too risky for our taste. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, Pan Malaysia Holdings Berhad has 4 warning signs (and 3 that are of concern) we think you should be aware of.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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