Does Pan Malaysia Holdings Berhad (KLSE:PMHLDG) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Pan Malaysia Holdings Berhad (KLSE:PMHLDG) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Pan Malaysia Holdings Berhad

What Is Pan Malaysia Holdings Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Pan Malaysia Holdings Berhad had RM14.3m in debt in December 2020; about the same as the year before. However, it does have RM423.0k in cash offsetting this, leading to net debt of about RM13.9m.

How Strong Is Pan Malaysia Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Pan Malaysia Holdings Berhad had liabilities of RM8.05m falling due within a year, and liabilities of RM13.8m due beyond that. Offsetting these obligations, it had cash of RM423.0k as well as receivables valued at RM791.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM20.6m.

Pan Malaysia Holdings Berhad has a market capitalization of RM92.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Pan Malaysia Holdings 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.

In the last year Pan Malaysia Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 55%, to RM3.8m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Pan Malaysia Holdings Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at RM4.3m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of RM3.5m into a profit. So to be blunt we do think it is risky. 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. Case in point: We've spotted 3 warning signs for Pan Malaysia Holdings Berhad you should be aware of, and 2 of them are concerning.

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. 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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