Is Pasukhas Group Berhad (KLSE:PASUKGB) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Pasukhas Group Berhad (KLSE:PASUKGB) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Pasukhas Group Berhad

How Much Debt Does Pasukhas Group Berhad Carry?

The image below, which you can click on for greater detail, shows that Pasukhas Group Berhad had debt of RM17.0m at the end of March 2021, a reduction from RM39.0m over a year. However, its balance sheet shows it holds RM24.6m in cash, so it actually has RM7.52m net cash.

A Look At Pasukhas Group Berhad's Liabilities

The latest balance sheet data shows that Pasukhas Group Berhad had liabilities of RM41.9m due within a year, and liabilities of RM14.7m falling due after that. Offsetting this, it had RM24.6m in cash and RM75.5m in receivables that were due within 12 months. So it can boast RM43.3m more liquid assets than total liabilities.

This surplus liquidity suggests that Pasukhas Group Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Pasukhas Group 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 Pasukhas Group 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.

In the last year Pasukhas Group Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 42%, to RM29m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Pasukhas Group Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Pasukhas Group Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM16m and booked a RM36m accounting loss. With only RM7.52m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Pasukhas Group Berhad may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with Pasukhas Group Berhad (including 3 which are 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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