Pintaras Jaya Berhad (KLSE:PTARAS) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Pintaras Jaya Berhad (KLSE:PTARAS) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Pintaras Jaya Berhad

How Much Debt Does Pintaras Jaya Berhad Carry?

As you can see below, Pintaras Jaya Berhad had RM6.66m of debt at December 2020, down from RM16.1m a year prior. But it also has RM113.9m in cash to offset that, meaning it has RM107.2m net cash.

A Look At Pintaras Jaya Berhad's Liabilities

We can see from the most recent balance sheet that Pintaras Jaya Berhad had liabilities of RM186.5m falling due within a year, and liabilities of RM39.7m due beyond that. Offsetting this, it had RM113.9m in cash and RM196.8m in receivables that were due within 12 months. So it can boast RM84.5m more liquid assets than total liabilities.

This excess liquidity suggests that Pintaras Jaya Berhad is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Pintaras Jaya Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Pintaras Jaya Berhad saw its EBIT decline by 8.7% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Pintaras Jaya Berhad can strengthen its balance sheet over time. 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. While Pintaras Jaya 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 most recent three years, Pintaras Jaya Berhad recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Pintaras Jaya Berhad has net cash of RM107.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in RM56m. So is Pintaras Jaya Berhad's debt a risk? It doesn't seem so to us. 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 Pintaras Jaya Berhad is showing 1 warning sign in our investment analysis , you should know about...

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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