These 4 Measures Indicate That PPS International (Holdings) (HKG:8201) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for PPS International (Holdings)

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

You can click the graphic below for the historical numbers, but it shows that as of June 2020 PPS International (Holdings) had HK$32.3m of debt, an increase on HK$9.72m, over one year. However, it does have HK$66.6m in cash offsetting this, leading to net cash of HK$34.3m.

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$74.4m due within 12 months and liabilities of HK$10.7m due beyond that. On the other hand, it had cash of HK$66.6m and HK$128.4m worth of receivables due within a year. So it can boast HK$109.8m 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. 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!

It is just as well that PPS International (Holdings)'s load is not too heavy, because its EBIT was down 55% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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.

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. During the last three years, PPS International (Holdings) burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case PPS International (Holdings) has HK$34.3m in net cash and a strong balance sheet. 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that PPS International (Holdings) is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

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. 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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