Is Pekat Group Berhad (KLSE:PEKAT) 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. Importantly, Pekat Group Berhad (KLSE:PEKAT) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Pekat Group Berhad

How Much Debt Does Pekat Group Berhad Carry?

As you can see below, at the end of September 2024, Pekat Group Berhad had RM7.88m of debt, up from RM1.81m a year ago. Click the image for more detail. However, it does have RM54.1m in cash offsetting this, leading to net cash of RM46.2m.

How Strong Is Pekat Group Berhad's Balance Sheet?

We can see from the most recent balance sheet that Pekat Group Berhad had liabilities of RM77.8m falling due within a year, and liabilities of RM2.48m due beyond that. On the other hand, it had cash of RM54.1m and RM123.7m worth of receivables due within a year. So it can boast RM97.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Pekat Group Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Pekat Group Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Pekat Group Berhad has boosted its EBIT by 57%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Pekat Group Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Pekat Group Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Pekat Group Berhad recorded free cash flow of 25% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Pekat Group Berhad has net cash of RM46.2m, as well as more liquid assets than liabilities. And we liked the look of last year's 57% year-on-year EBIT growth. So is Pekat Group Berhad's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Pekat Group Berhad, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.