Is PCCS Group Berhad (KLSE:PCCS) A Risky Investment?

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. We can see that PCCS Group Berhad (KLSE:PCCS) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for PCCS Group Berhad

How Much Debt Does PCCS Group Berhad Carry?

The image below, which you can click on for greater detail, shows that PCCS Group Berhad had debt of RM45.8m at the end of December 2020, a reduction from RM64.7m over a year. But it also has RM59.8m in cash to offset that, meaning it has RM14.0m net cash.

How Strong Is PCCS Group Berhad's Balance Sheet?

According to the last reported balance sheet, PCCS Group Berhad had liabilities of RM97.2m due within 12 months, and liabilities of RM26.9m due beyond 12 months. Offsetting these obligations, it had cash of RM59.8m as well as receivables valued at RM42.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM21.5m.

Of course, PCCS Group Berhad has a market capitalization of RM115.3m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, PCCS Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, PCCS Group Berhad's EBIT fell a jaw-dropping 76% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While PCCS Group 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 three years, PCCS Group 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 PCCS Group Berhad does have more liabilities than liquid assets, it also has net cash of RM14.0m. So although we see some areas for improvement, we're not too worried about PCCS Group Berhad's balance sheet. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that PCCS Group Berhad is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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