Does PPS International (Holdings) (HKG:8201) Have A Healthy Balance Sheet?

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. As with many other companies PPS International (Holdings) Limited (HKG:8201) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that 8201 is potentially undervalued!

What Is PPS International (Holdings)'s Debt?

As you can see below, PPS International (Holdings) had HK$21.4m of debt at June 2022, down from HK$32.3m a year prior. But on the other hand it also has HK$75.5m in cash, leading to a HK$54.2m net cash position.

How Strong Is PPS International (Holdings)'s Balance Sheet?

The latest balance sheet data shows that PPS International (Holdings) had liabilities of HK$77.4m due within a year, and liabilities of HK$1.02m falling due after that. On the other hand, it had cash of HK$75.5m and HK$146.5m worth of receivables due within a year. So it actually has HK$143.6m more liquid assets than total liabilities.

This luscious liquidity implies that PPS International (Holdings)'s balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, PPS International (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, PPS International (Holdings) grew its EBIT by 98% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is PPS International (Holdings)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. PPS International (Holdings) 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. In the last three years, PPS International (Holdings) created free cash flow amounting to 11% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that PPS International (Holdings) has net cash of HK$54.2m and plenty of liquid assets. And it impressed us with its EBIT growth of 98% over the last year. So is PPS International (Holdings)'s debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that PPS International (Holdings) is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.