Is Pesona Metro Holdings Berhad (KLSE:PESONA) A Risky Investment?

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.' 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 Pesona Metro Holdings Berhad (KLSE:PESONA) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Pesona Metro Holdings Berhad

What Is Pesona Metro Holdings Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Pesona Metro Holdings Berhad had RM207.4m of debt, an increase on RM145.7m, over one year. However, it also had RM29.6m in cash, and so its net debt is RM177.8m.

How Healthy Is Pesona Metro Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pesona Metro Holdings Berhad had liabilities of RM363.6m due within 12 months and liabilities of RM195.8m due beyond that. Offsetting this, it had RM29.6m in cash and RM340.3m in receivables that were due within 12 months. So its liabilities total RM189.5m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's RM166.8m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pesona Metro Holdings Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Pesona Metro Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to RM666m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Pesona Metro Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at RM14m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of RM691k over the last twelve months. That means it's on the risky side of things. 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. For example, we've discovered 3 warning signs for Pesona Metro Holdings Berhad (1 is significant!) that you should be aware of before investing here.

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. 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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