Here's Why Pan Malaysia Holdings Berhad (KLSE:PMHLDG) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 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. If things get really bad, the lenders can take control of the business. 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, 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.

View our latest analysis for Pan Malaysia Holdings Berhad

What Is Pan Malaysia Holdings Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that Pan Malaysia Holdings Berhad had RM14.5m in debt in September 2021; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

A Look At Pan Malaysia Holdings Berhad's Liabilities

We can see from the most recent balance sheet that Pan Malaysia Holdings Berhad had liabilities of RM9.01m falling due within a year, and liabilities of RM13.6m due beyond that. On the other hand, it had cash of RM220.0k and RM32.7m worth of receivables due within a year. So it actually has RM10.3m more liquid assets than total liabilities.

It's good to see that Pan Malaysia Holdings Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Pan Malaysia Holdings 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.

In the last year Pan Malaysia Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 74%, to RM1.5m. To be frank that doesn't bode well.

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 RM2.1m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Pan Malaysia Holdings Berhad has 4 warning signs (and 3 which are concerning) we think you should know about.

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.