PPS International (Holdings) (HKG:8201) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies PPS International (Holdings) Limited (HKG:8201) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Debt?

As you can see below, PPS International (Holdings) had HK$32.3m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have HK$74.1m in cash offsetting this, leading to net cash of HK$41.7m.

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

According to the last reported balance sheet, PPS International (Holdings) had liabilities of HK$89.6m due within 12 months, and liabilities of HK$1.98m due beyond 12 months. Offsetting these obligations, it had cash of HK$74.1m as well as receivables valued at HK$151.0m due within 12 months. So it can boast HK$133.5m more liquid assets than total liabilities.

This surplus strongly suggests that PPS International (Holdings) has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, PPS International (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, PPS International (Holdings)'s EBIT fell a jaw-dropping 62% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. 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. 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. During the last three years, PPS International (Holdings) burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that PPS International (Holdings) has net cash of HK$41.7m and plenty of liquid assets. So we are not troubled with PPS International (Holdings)'s debt use. 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. For instance, we've identified 3 warning signs for PPS International (Holdings) (1 is concerning) you should be aware of.

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.

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.

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