Prolexus Berhad (KLSE:PRLEXUS) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Prolexus Berhad (KLSE:PRLEXUS) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Prolexus Berhad

How Much Debt Does Prolexus Berhad Carry?

The chart below, which you can click on for greater detail, shows that Prolexus Berhad had RM71.8m in debt in April 2023; about the same as the year before. But on the other hand it also has RM128.3m in cash, leading to a RM56.5m net cash position.

How Strong Is Prolexus Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Prolexus Berhad had liabilities of RM56.1m due within 12 months and liabilities of RM42.1m due beyond that. Offsetting these obligations, it had cash of RM128.3m as well as receivables valued at RM72.1m due within 12 months. So it actually has RM102.3m more liquid assets than total liabilities.

This excess liquidity is a great indication that Prolexus Berhad's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Prolexus Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Prolexus Berhad turned things around in the last 12 months, delivering and EBIT of RM39m. 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 Prolexus Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last year, Prolexus Berhad recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Prolexus Berhad has net cash of RM56.5m, as well as more liquid assets than liabilities. So we don't think Prolexus Berhad's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Prolexus Berhad .

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.