Here's Why Paragon Union Berhad (KLSE:PARAGON) Can Afford Some Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Paragon Union Berhad (KLSE:PARAGON) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Paragon Union Berhad

How Much Debt Does Paragon Union Berhad Carry?

As you can see below, Paragon Union Berhad had RM12.3m of debt at September 2023, down from RM17.9m a year prior. However, it does have RM6.24m in cash offsetting this, leading to net debt of about RM6.03m.

How Strong Is Paragon Union Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Paragon Union Berhad had liabilities of RM20.2m due within 12 months and liabilities of RM5.19m due beyond that. Offsetting these obligations, it had cash of RM6.24m as well as receivables valued at RM14.0m due within 12 months. So its liabilities total RM5.18m more than the combination of its cash and short-term receivables.

Having regard to Paragon Union Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the RM308.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But it is Paragon Union 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.

In the last year Paragon Union Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to RM77m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Paragon Union Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM7.6m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM4.4m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Paragon Union Berhad that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.