PCCS Group Berhad (KLSE:PCCS) Has A Pretty Healthy Balance Sheet

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. Importantly, PCCS Group Berhad (KLSE:PCCS) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View 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 RM38.3m at the end of June 2022, a reduction from RM57.6m over a year. However, it does have RM69.2m in cash offsetting this, leading to net cash of RM30.9m.

How Healthy Is PCCS Group Berhad's Balance Sheet?

According to the last reported balance sheet, PCCS Group Berhad had liabilities of RM138.2m due within 12 months, and liabilities of RM9.19m due beyond 12 months. Offsetting this, it had RM69.2m in cash and RM91.2m in receivables that were due within 12 months. So it actually has RM13.1m more liquid assets than total liabilities.

This short term liquidity is a sign that PCCS Group Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, PCCS Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that PCCS Group Berhad has boosted its EBIT by 82%, thus reducing the spectre of future debt repayments. 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. During the last three years, PCCS Group Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case PCCS Group Berhad has RM30.9m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 82% over the last year. So we don't have any problem with PCCS Group Berhad's use of debt. 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 3 warning signs for PCCS Group Berhad you should be aware of, and 2 of them don't sit too well with us.

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.