Would Pensonic Holdings Berhad (KLSE:PENSONI) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Pensonic Holdings Berhad (KLSE:PENSONI) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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 Pensonic Holdings Berhad

What Is Pensonic Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that Pensonic Holdings Berhad had debt of RM62.9m at the end of August 2024, a reduction from RM79.7m over a year. On the flip side, it has RM29.2m in cash leading to net debt of about RM33.7m.

How Healthy Is Pensonic Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Pensonic Holdings Berhad had liabilities of RM98.3m due within a year, and liabilities of RM22.6m falling due after that. Offsetting these obligations, it had cash of RM29.2m as well as receivables valued at RM56.8m due within 12 months. So it has liabilities totalling RM34.9m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Pensonic Holdings Berhad is worth RM72.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Pensonic Holdings 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.

Over 12 months, Pensonic Holdings Berhad reported revenue of RM316m, which is a gain of 16%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Pensonic Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM5.8m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of RM14m. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Pensonic Holdings Berhad (1 is a bit concerning!) that you should be aware of before investing here.

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. 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.