Is PRG Holdings Berhad (KLSE:PRG) Using Too Much Debt?

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. We can see that PRG Holdings Berhad (KLSE:PRG) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 PRG Holdings Berhad had debt of RM45.5m at the end of December 2023, a reduction from RM76.1m over a year. However, it does have RM101.1m in cash offsetting this, leading to net cash of RM55.6m.

A Look At PRG Holdings Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that PRG Holdings Berhad had liabilities of RM157.5m due within 12 months and liabilities of RM42.4m due beyond that. On the other hand, it had cash of RM101.1m and RM188.8m worth of receivables due within a year. So it actually has RM90.0m more liquid assets than total liabilities.

This surplus liquidity suggests that PRG Holdings Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, PRG Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that PRG Holdings Berhad's load is not too heavy, because its EBIT was down 39% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. PRG Holdings Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, PRG Holdings Berhad recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case PRG Holdings Berhad has RM55.6m in net cash and a strong balance sheet. And it impressed us with free cash flow of RM43m, being 67% of its EBIT. So we don't think PRG Holdings Berhad's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for PRG Holdings Berhad that you should be aware of.

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.