Is Propel Global Berhad (KLSE:PGB) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Propel Global Berhad (KLSE:PGB) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Propel Global Berhad

What Is Propel Global Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Propel Global Berhad had RM18.6m of debt in December 2023, down from RM34.9m, one year before. However, it does have RM35.1m in cash offsetting this, leading to net cash of RM16.5m.

How Strong Is Propel Global Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Propel Global Berhad had liabilities of RM83.6m due within 12 months and liabilities of RM21.8m due beyond that. Offsetting these obligations, it had cash of RM35.1m as well as receivables valued at RM93.7m due within 12 months. So it actually has RM23.5m more liquid assets than total liabilities.

This surplus suggests that Propel Global Berhad is using debt in a way that is appears to be both safe and conservative. 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 Propel Global Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Propel Global Berhad's EBIT fell a jaw-dropping 90% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Propel Global Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Propel Global 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, Propel Global Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Propel Global Berhad has RM16.5m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Propel Global Berhad's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Propel Global Berhad has 5 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.