These 4 Measures Indicate That Progressive Impact Corporation Berhad (KLSE:PICORP) Is Using Debt Reasonably Well

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 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 Progressive Impact Corporation Berhad (KLSE:PICORP) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Progressive Impact Corporation Berhad

How Much Debt Does Progressive Impact Corporation Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Progressive Impact Corporation Berhad had RM57.7m of debt, an increase on RM55.3m, over one year. However, because it has a cash reserve of RM45.2m, its net debt is less, at about RM12.5m.

How Healthy Is Progressive Impact Corporation Berhad's Balance Sheet?

The latest balance sheet data shows that Progressive Impact Corporation Berhad had liabilities of RM80.4m due within a year, and liabilities of RM5.58m falling due after that. Offsetting this, it had RM45.2m in cash and RM46.0m in receivables that were due within 12 months. So it actually has RM5.22m more liquid assets than total liabilities.

This short term liquidity is a sign that Progressive Impact Corporation Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Looking at its net debt to EBITDA of 0.70 and interest cover of 3.5 times, it seems to us that Progressive Impact Corporation Berhad is probably using debt in a pretty reasonable way. So we'd recommend keeping a close eye on the impact financing costs are having on the business. Pleasingly, Progressive Impact Corporation Berhad is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 118% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Progressive Impact Corporation 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Progressive Impact Corporation Berhad's free cash flow amounted to 35% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

Progressive Impact Corporation Berhad's EBIT growth rate suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But truth be told we feel its interest cover does undermine this impression a bit. When we consider the range of factors above, it looks like Progressive Impact Corporation Berhad is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. 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. For instance, we've identified 3 warning signs for Progressive Impact Corporation Berhad (1 can't be ignored) you should be aware of.

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.