Is Pansar Berhad (KLSE:PANSAR) A Risky Investment?

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. As with many other companies Pansar Berhad (KLSE:PANSAR) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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.

See our latest analysis for Pansar Berhad

How Much Debt Does Pansar Berhad Carry?

As you can see below, Pansar Berhad had RM7.14m of debt at September 2020, down from RM23.1m a year prior. However, it does have RM33.4m in cash offsetting this, leading to net cash of RM26.2m.

How Strong Is Pansar Berhad's Balance Sheet?

According to the last reported balance sheet, Pansar Berhad had liabilities of RM68.1m due within 12 months, and liabilities of RM7.02m due beyond 12 months. Offsetting these obligations, it had cash of RM33.4m as well as receivables valued at RM121.7m due within 12 months. So it actually has RM79.9m more liquid assets than total liabilities.

This surplus suggests that Pansar Berhad is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Pansar 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 you can't view debt in total isolation; since Pansar 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.

Over 12 months, Pansar Berhad made a loss at the EBIT level, and saw its revenue drop to RM293m, which is a fall of 15%. That's not what we would hope to see.

So How Risky Is Pansar Berhad?

While Pansar Berhad lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of RM2.1m. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Pansar Berhad (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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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