These 4 Measures Indicate That Pecca Group Berhad (KLSE:PECCA) Is Using Debt Safely

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, Pecca Group Berhad (KLSE:PECCA) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Pecca Group Berhad

How Much Debt Does Pecca Group Berhad Carry?

As you can see below, at the end of March 2023, Pecca Group Berhad had RM9.03m of debt, up from RM2.32m a year ago. Click the image for more detail. However, it does have RM88.8m in cash offsetting this, leading to net cash of RM79.8m.

A Look At Pecca Group Berhad's Liabilities

The latest balance sheet data shows that Pecca Group Berhad had liabilities of RM29.5m due within a year, and liabilities of RM11.0m falling due after that. On the other hand, it had cash of RM88.8m and RM65.0m worth of receivables due within a year. So it actually has RM113.3m more liquid assets than total liabilities.

This excess liquidity suggests that Pecca Group Berhad is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Pecca Group Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Pecca Group Berhad grew its EBIT by 113% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Pecca Group Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Pecca Group Berhad 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. Over the last three years, Pecca Group Berhad reported free cash flow worth 19% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Pecca Group Berhad has RM79.8m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 113% over the last year. So we don't think Pecca Group Berhad's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Pecca Group Berhad's earnings per share history for free.

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. 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.