Is Paragon Globe Berhad (KLSE:PGLOBE) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Paragon Globe Berhad (KLSE:PGLOBE) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Paragon Globe Berhad

What Is Paragon Globe Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Paragon Globe Berhad had RM42.0m of debt, an increase on none, over one year. But it also has RM118.2m in cash to offset that, meaning it has RM76.2m net cash.

How Strong Is Paragon Globe Berhad's Balance Sheet?

The latest balance sheet data shows that Paragon Globe Berhad had liabilities of RM18.6m due within a year, and liabilities of RM48.0m falling due after that. Offsetting this, it had RM118.2m in cash and RM21.4m in receivables that were due within 12 months. So it can boast RM72.9m more liquid assets than total liabilities.

This luscious liquidity implies that Paragon Globe Berhad's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Paragon Globe Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Paragon Globe Berhad had a loss before interest and tax, and actually shrunk its revenue by 10.0%, to RM49m. We would much prefer see growth.

So How Risky Is Paragon Globe Berhad?

While Paragon Globe Berhad lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of RM4.2m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. There's no doubt the next few years will be crucial to how the business matures. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Paragon Globe Berhad that you should be aware of before investing here.

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.