Is PRG Holdings Berhad (KLSE:PRG) Using Debt In A Risky Way?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, PRG Holdings Berhad (KLSE:PRG) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for PRG Holdings Berhad

What Is PRG Holdings Berhad's Net Debt?

As you can see below, PRG Holdings Berhad had RM21.6m of debt at September 2020, down from RM35.5m a year prior. But it also has RM31.5m in cash to offset that, meaning it has RM9.90m net cash.

A Look At PRG Holdings Berhad's Liabilities

The latest balance sheet data shows that PRG Holdings Berhad had liabilities of RM124.1m due within a year, and liabilities of RM45.1m falling due after that. On the other hand, it had cash of RM31.5m and RM77.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM60.7m.

This is a mountain of leverage relative to its market capitalization of RM77.4m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, PRG Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since PRG Holdings Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year PRG Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 289%, to RM217m. That's virtually the hole-in-one of revenue growth!

So How Risky Is PRG Holdings Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months PRG Holdings Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM25m and booked a RM19m accounting loss. However, it has net cash of RM9.90m, so it has a bit of time before it will need more capital. Importantly, PRG Holdings Berhad's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. Take risks, for example - PRG Holdings Berhad has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

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. 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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