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

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. We can see that PRG Holdings Berhad (KLSE:PRG) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 PRG Holdings Berhad

How Much Debt Does PRG Holdings Berhad Carry?

The image below, which you can click on for greater detail, shows that at March 2021 PRG Holdings Berhad had debt of RM60.1m, up from RM30.9m in one year. However, it also had RM39.7m in cash, and so its net debt is RM20.4m.

How Healthy 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 RM91.2m due within 12 months and liabilities of RM81.5m due beyond that. On the other hand, it had cash of RM39.7m and RM63.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM69.0m.

This is a mountain of leverage relative to its market capitalization of RM79.4m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is PRG 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.

In the last year PRG Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 62%, to RM227m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though PRG Holdings Berhad managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping RM29m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM23m of cash over the last year. So suffice it to say we consider the stock very risky. 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 PRG Holdings Berhad has 2 warning signs (and 1 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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