Rock star Growth Puts Parlo Berhad (KLSE:PARLO) In A Position To Use 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. We can see that Parlo Berhad (KLSE:PARLO) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Our analysis indicates that PARLO is potentially overvalued!

What Is Parlo Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Parlo Berhad had RM7.99m of debt, an increase on RM3.39m, over one year. However, its balance sheet shows it holds RM18.7m in cash, so it actually has RM10.7m net cash.

How Healthy Is Parlo Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Parlo Berhad had liabilities of RM12.9m due within 12 months and liabilities of RM1.97m due beyond that. On the other hand, it had cash of RM18.7m and RM15.9m worth of receivables due within a year. So it can boast RM19.8m more liquid assets than total liabilities.

This surplus strongly suggests that Parlo Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Parlo 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 Parlo Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Parlo Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 8,033%, to RM82m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Parlo Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Parlo Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM15m and booked a RM7.5m accounting loss. But at least it has RM10.7m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Parlo Berhad has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. Case in point: We've spotted 5 warning signs for Parlo Berhad you should be aware of, and 4 of them can't be ignored.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.