Stock Analysis

We Think Powerwell Holdings Berhad (KLSE:PWRWELL) Can Stay On Top Of Its Debt

KLSE:PWRWELL
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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 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. We note that Powerwell Holdings Berhad (KLSE:PWRWELL) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Powerwell Holdings Berhad

What Is Powerwell Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Powerwell Holdings Berhad had debt of RM26.7m, up from RM20.4m in one year. However, its balance sheet shows it holds RM49.7m in cash, so it actually has RM23.1m net cash.

debt-equity-history-analysis
KLSE:PWRWELL Debt to Equity History August 21st 2023

A Look At Powerwell Holdings Berhad's Liabilities

The latest balance sheet data shows that Powerwell Holdings Berhad had liabilities of RM69.6m due within a year, and liabilities of RM8.46m falling due after that. On the other hand, it had cash of RM49.7m and RM54.0m worth of receivables due within a year. So it actually has RM25.7m more liquid assets than total liabilities.

This surplus suggests that Powerwell Holdings Berhad is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Powerwell Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Powerwell Holdings Berhad turned things around in the last 12 months, delivering and EBIT of RM8.8m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Powerwell Holdings 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Powerwell Holdings 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. In the last year, Powerwell Holdings Berhad's free cash flow amounted to 48% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Powerwell Holdings Berhad has net cash of RM23.1m, as well as more liquid assets than liabilities. So is Powerwell Holdings 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Powerwell Holdings Berhad has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Powerwell Holdings Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.