Does PCCS Group Berhad (KLSE:PCCS) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies PCCS Group Berhad (KLSE:PCCS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for PCCS Group Berhad

What Is PCCS Group Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 PCCS Group Berhad had debt of RM68.6m, up from RM58.1m in one year. However, it does have RM49.8m in cash offsetting this, leading to net debt of about RM18.8m.

How Strong Is PCCS Group Berhad's Balance Sheet?

The latest balance sheet data shows that PCCS Group Berhad had liabilities of RM171.1m due within a year, and liabilities of RM12.4m falling due after that. On the other hand, it had cash of RM49.8m and RM69.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM63.8m.

While this might seem like a lot, it is not so bad since PCCS Group Berhad has a market capitalization of RM112.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is PCCS Group 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.

In the last year PCCS Group Berhad had a loss before interest and tax, and actually shrunk its revenue by 19%, to RM377m. That's not what we would hope to see.

Caveat Emptor

While PCCS Group Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at RM267k. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM38m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. Case in point: We've spotted 4 warning signs for PCCS Group Berhad you should be aware of, and 2 of them are concerning.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

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