Pasdec Holdings Berhad (KLSE:PASDEC) Has Debt But No Earnings; Should You Worry?

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.' 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 Pasdec Holdings Berhad (KLSE:PASDEC) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Pasdec Holdings Berhad

What Is Pasdec Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that Pasdec Holdings Berhad had debt of RM12.9m at the end of March 2022, a reduction from RM22.7m over a year. But it also has RM22.1m in cash to offset that, meaning it has RM9.24m net cash.

A Look At Pasdec Holdings Berhad's Liabilities

The latest balance sheet data shows that Pasdec Holdings Berhad had liabilities of RM36.9m due within a year, and liabilities of RM5.96m falling due after that. Offsetting these obligations, it had cash of RM22.1m as well as receivables valued at RM22.5m due within 12 months. So it actually has RM1.78m more liquid assets than total liabilities.

Having regard to Pasdec Holdings Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the RM148.1m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Pasdec Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Pasdec Holdings Berhad'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.

In the last year Pasdec Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 31%, to RM36m. To be frank that doesn't bode well.

So How Risky Is Pasdec Holdings Berhad?

Although Pasdec Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of RM637k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 3 warning signs for Pasdec Holdings Berhad you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.