Is PRG Holdings Berhad (KLSE:PRG) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 PRG Holdings Berhad (KLSE:PRG) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for PRG Holdings Berhad

How Much Debt Does PRG Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 PRG Holdings Berhad had RM61.2m of debt, an increase on RM43.1m, over one year. However, because it has a cash reserve of RM34.9m, its net debt is less, at about RM26.3m.

How Strong Is PRG Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PRG Holdings Berhad had liabilities of RM113.0m due within 12 months and liabilities of RM84.2m due beyond that. Offsetting this, it had RM34.9m in cash and RM62.5m in receivables that were due within 12 months. So its liabilities total RM99.8m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of RM88.0m, we think shareholders really should watch PRG Holdings Berhad's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since PRG Holdings 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.

In the last year PRG Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 49%, to RM196m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, PRG Holdings Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM46m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through RM39m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that PRG Holdings Berhad is showing 5 warning signs in our investment analysis , and 2 of those 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.

When trading PRG Holdings Berhad or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.