Is Prolexus Berhad (KLSE:PRLEXUS) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Prolexus Berhad (KLSE:PRLEXUS) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Prolexus Berhad

What Is Prolexus Berhad's Net Debt?

As you can see below, Prolexus Berhad had RM91.3m of debt, at October 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds RM147.0m in cash, so it actually has RM55.7m net cash.

How Strong Is Prolexus Berhad's Balance Sheet?

According to the last reported balance sheet, Prolexus Berhad had liabilities of RM81.8m due within 12 months, and liabilities of RM66.2m due beyond 12 months. Offsetting these obligations, it had cash of RM147.0m as well as receivables valued at RM40.1m due within 12 months. So it actually has RM39.0m more liquid assets than total liabilities.

This surplus suggests that Prolexus Berhad is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Prolexus Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Prolexus Berhad grew its EBIT by 142% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Prolexus 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Prolexus 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. During the last three years, Prolexus Berhad produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Prolexus Berhad has net cash of RM55.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 142% over the last year. So is Prolexus Berhad's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Prolexus Berhad (1 can't be ignored!) that you should be aware of before investing here.

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. 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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