We Think PRG Holdings Berhad (KLSE:PRG) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, PRG Holdings Berhad (KLSE:PRG) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

See 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 RM65.5m at the end of December 2022, a reduction from RM95.6m over a year. However, its balance sheet shows it holds RM71.5m in cash, so it actually has RM5.97m net cash.

How Strong Is PRG Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that PRG Holdings Berhad had liabilities of RM183.7m falling due within a year, and liabilities of RM50.3m due beyond that. On the other hand, it had cash of RM71.5m and RM170.7m worth of receivables due within a year. So it actually has RM8.19m more liquid assets than total liabilities.

This short term liquidity is a sign that PRG Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that PRG Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, PRG Holdings Berhad grew its EBIT by 1,086% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is PRG Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While PRG Holdings Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent two years, PRG Holdings Berhad recorded free cash flow of 29% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case PRG Holdings Berhad has RM5.97m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 1,086% over the last year. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for PRG Holdings Berhad you should know about.

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.