Is PCCS Group Berhad (KLSE:PCCS) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies PCCS Group Berhad (KLSE:PCCS) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for PCCS Group Berhad

How Much Debt Does PCCS Group Berhad Carry?

As you can see below, PCCS Group Berhad had RM33.0m of debt at September 2022, down from RM55.7m a year prior. However, its balance sheet shows it holds RM90.0m in cash, so it actually has RM56.9m net cash.

A Look At PCCS Group Berhad's Liabilities

The latest balance sheet data shows that PCCS Group Berhad had liabilities of RM119.9m due within a year, and liabilities of RM10.0m falling due after that. Offsetting these obligations, it had cash of RM90.0m as well as receivables valued at RM62.1m due within 12 months. So it actually has RM22.2m more liquid assets than total liabilities.

It's good to see that PCCS Group Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that PCCS Group Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, PCCS Group Berhad grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since PCCS Group Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Considering the last three years, PCCS Group Berhad actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case PCCS Group Berhad has RM56.9m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 33% over the last year. So we don't have any problem with PCCS Group Berhad's use of debt. 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. We've identified 3 warning signs with PCCS Group Berhad , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.