Is Pasdec Holdings Berhad (KLSE:PASDEC) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Pasdec Holdings Berhad (KLSE:PASDEC) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Pasdec Holdings Berhad

How Much Debt Does Pasdec Holdings Berhad Carry?

As you can see below, Pasdec Holdings Berhad had RM34.9m of debt at September 2020, down from RM88.7m a year prior. However, it also had RM16.5m in cash, and so its net debt is RM18.5m.

How Healthy Is Pasdec Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Pasdec Holdings Berhad had liabilities of RM181.4m falling due within a year, and liabilities of RM2.04m due beyond that. On the other hand, it had cash of RM16.5m and RM37.5m worth of receivables due within a year. So its liabilities total RM129.4m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the RM84.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Pasdec Holdings Berhad would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Pasdec Holdings Berhad will need earnings to service that debt. 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.

While it hasn't made a profit, at least Pasdec Holdings Berhad booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Over the last twelve months Pasdec Holdings Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable RM17m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of RM24m over the last twelve months. That means it's on the risky side of things. 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. For instance, we've identified 2 warning signs for Pasdec Holdings Berhad (1 is a bit 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.

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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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