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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that PPS International (Holdings) Limited (HKG:8201) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for PPS International (Holdings)

What Is PPS International (Holdings)'s Net Debt?

The chart below, which you can click on for greater detail, shows that PPS International (Holdings) had HK$22.4m in debt in December 2022; about the same as the year before. However, its balance sheet shows it holds HK$90.2m in cash, so it actually has HK$67.7m net cash.

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

Zooming in on the latest balance sheet data, we can see that PPS International (Holdings) had liabilities of HK$77.0m due within 12 months and liabilities of HK$921.0k due beyond that. Offsetting this, it had HK$90.2m in cash and HK$139.2m in receivables that were due within 12 months. So it can boast HK$151.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that PPS International (Holdings)'s balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that PPS International (Holdings) has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that PPS International (Holdings)'s EBIT was down 85% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While PPS International (Holdings) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, PPS International (Holdings) produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case PPS International (Holdings) has HK$67.7m in net cash and a strong balance sheet. And it impressed us with free cash flow of HK$11m, being 73% of its EBIT. So is PPS International (Holdings)'s debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for PPS International (Holdings) (1 is potentially serious!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.