P.I.E. Industrial Berhad (KLSE:PIE) Has A Pretty Healthy Balance Sheet

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 note that P.I.E. Industrial Berhad (KLSE:PIE) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for P.I.E. Industrial Berhad

What Is P.I.E. Industrial Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 P.I.E. Industrial Berhad had RM45.7m of debt, an increase on none, over one year. However, it does have RM66.2m in cash offsetting this, leading to net cash of RM20.5m.

How Strong Is P.I.E. Industrial Berhad's Balance Sheet?

The latest balance sheet data shows that P.I.E. Industrial Berhad had liabilities of RM218.1m due within a year, and liabilities of RM4.81m falling due after that. On the other hand, it had cash of RM66.2m and RM264.0m worth of receivables due within a year. So it actually has RM107.3m more liquid assets than total liabilities.

This short term liquidity is a sign that P.I.E. Industrial Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, P.I.E. Industrial Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that P.I.E. Industrial Berhad grew its EBIT by 188% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine P.I.E. Industrial Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. P.I.E. Industrial 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. Over the last three years, P.I.E. Industrial 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 we empathize with investors who find debt concerning, you should keep in mind that P.I.E. Industrial Berhad has net cash of RM20.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 188% over the last year. So we are not troubled with P.I.E. Industrial Berhad's debt use. 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. Be aware that P.I.E. Industrial Berhad is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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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