Does Paragon Globe Berhad (KLSE:PGLOBE) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Paragon Globe Berhad (KLSE:PGLOBE) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Paragon Globe Berhad

How Much Debt Does Paragon Globe Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Paragon Globe Berhad had RM14.5m of debt in March 2021, down from RM26.1m, one year before. However, it does have RM41.4m in cash offsetting this, leading to net cash of RM27.0m.

A Look At Paragon Globe Berhad's Liabilities

The latest balance sheet data shows that Paragon Globe Berhad had liabilities of RM12.3m due within a year, and liabilities of RM20.6m falling due after that. Offsetting these obligations, it had cash of RM41.4m as well as receivables valued at RM30.8m due within 12 months. So it can boast RM39.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Paragon Globe Berhad's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Paragon Globe Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Paragon Globe Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Paragon Globe Berhad made a loss at the EBIT level, and saw its revenue drop to RM22m, which is a fall of 70%. To be frank that doesn't bode well.

So How Risky Is Paragon Globe Berhad?

Although Paragon Globe Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM23m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The next few years will be important as the business matures. 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 - Paragon Globe Berhad has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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