PPS International (Holdings) (HKG:8201) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that PPS International (Holdings) Limited (HKG:8201) does use debt in its business. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

What Is PPS International (Holdings)'s Debt?

You can click the graphic below for the historical numbers, but it shows that PPS International (Holdings) had HK$18.9m of debt in December 2024, down from HK$19.9m, one year before. But on the other hand it also has HK$115.8m in cash, leading to a HK$97.0m net cash position.

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$96.7m due within 12 months and liabilities of HK$536.0k due beyond that. Offsetting this, it had HK$115.8m in cash and HK$112.9m in receivables that were due within 12 months. So it can boast HK$131.5m more liquid assets than total liabilities.

This surplus liquidity suggests that PPS International (Holdings)'s balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, PPS International (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for PPS International (Holdings)

Fortunately, PPS International (Holdings) grew its EBIT by 2.0% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, PPS International (Holdings) actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case PPS International (Holdings) has HK$97.0m in net cash and a strong balance sheet. The cherry on top was that in converted 331% of that EBIT to free cash flow, bringing in HK$27m. So we don't think PPS International (Holdings)'s use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with PPS International (Holdings) .

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.