PPS International (Holdings) (HKG:8201) Seems To Use Debt Rather Sparingly

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. Importantly, PPS International (Holdings) Limited (HKG:8201) does carry debt. But the real question is whether this debt is making the company risky.

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for PPS International (Holdings)

What Is PPS International (Holdings)'s Debt?

As you can see below, PPS International (Holdings) had HK$19.9m of debt at December 2023, down from HK$20.8m a year prior. But it also has HK$108.3m in cash to offset that, meaning it has HK$88.4m net cash.

How Strong 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$98.6m due within 12 months and liabilities of HK$710.0k due beyond that. On the other hand, it had cash of HK$108.3m and HK$134.6m 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. 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.

Another good sign is that PPS International (Holdings) has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. 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 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. 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. Happily for any shareholders, PPS International (Holdings) actually produced more free cash flow than EBIT over the last three years. 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$88.4m in net cash and a strong balance sheet. The cherry on top was that in converted 151% of that EBIT to free cash flow, bringing in HK$13m. The bottom line is that we do not find PPS International (Holdings)'s debt levels at all concerning. 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 3 warning signs for PPS International (Holdings) (2 shouldn't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.