Is Prolexus Berhad (KLSE:PRLEXUS) Weighed On By Its Debt Load?

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 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. We note that Prolexus Berhad (KLSE:PRLEXUS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Prolexus Berhad

What Is Prolexus Berhad's Net Debt?

As you can see below, Prolexus Berhad had RM71.9m of debt at April 2022, down from RM88.8m a year prior. However, its balance sheet shows it holds RM94.5m in cash, so it actually has RM22.7m net cash.

How Strong Is Prolexus Berhad's Balance Sheet?

According to the last reported balance sheet, Prolexus Berhad had liabilities of RM49.1m due within 12 months, and liabilities of RM54.6m due beyond 12 months. On the other hand, it had cash of RM94.5m and RM75.7m worth of receivables due within a year. So it actually has RM66.5m more liquid assets than total liabilities.

This surplus strongly suggests that Prolexus Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Prolexus Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Prolexus 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.

In the last year Prolexus Berhad had a loss before interest and tax, and actually shrunk its revenue by 27%, to RM211m. To be frank that doesn't bode well.

So How Risky Is Prolexus Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Prolexus Berhad had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through RM26m of cash and made a loss of RM7.0m. With only RM22.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Prolexus Berhad (at least 1 which is significant) , and understanding them should be part of your investment process.

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.