These 4 Measures Indicate That Pintaras Jaya Berhad (KLSE:PTARAS) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Pintaras Jaya Berhad (KLSE:PTARAS) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Pintaras Jaya Berhad

What Is Pintaras Jaya Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Pintaras Jaya Berhad had debt of RM6.81m at the end of September 2020, a reduction from RM7.45m over a year. But it also has RM119.2m in cash to offset that, meaning it has RM112.4m net cash.

How Healthy Is Pintaras Jaya Berhad's Balance Sheet?

We can see from the most recent balance sheet that Pintaras Jaya Berhad had liabilities of RM158.7m falling due within a year, and liabilities of RM34.4m due beyond that. Offsetting this, it had RM119.2m in cash and RM165.8m in receivables that were due within 12 months. So it can boast RM91.9m more liquid assets than total liabilities.

It's good to see that Pintaras Jaya Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Pintaras Jaya Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Pintaras Jaya Berhad grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Pintaras Jaya Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Pintaras Jaya Berhad generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Pintaras Jaya Berhad has net cash of RM112.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in RM42m. When it comes to Pintaras Jaya Berhad's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. Be aware that Pintaras Jaya Berhad is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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