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

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

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Pan Malaysia Holdings Berhad

What Is Pan Malaysia Holdings Berhad's Net Debt?

As you can see below, Pan Malaysia Holdings Berhad had RM14.4m of debt at March 2020, down from RM15.5m a year prior. And it doesn't have much cash, so its net debt is about the same.

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

Zooming in on the latest balance sheet data, we can see that Pan Malaysia Holdings Berhad had liabilities of RM6.21m due within 12 months and liabilities of RM14.4m due beyond that. Offsetting this, it had RM225.0k in cash and RM943.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM19.5m.

Of course, Pan Malaysia Holdings Berhad has a market capitalization of RM222.9m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Pan Malaysia Holdings 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 Pan Malaysia Holdings Berhad had negative earnings before interest and tax, and actually shrunk its revenue by 3.5%, to RM7.7m. That's not what we would hope to see.

Caveat Emptor

Importantly, Pan Malaysia Holdings Berhad had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost RM3.0m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of RM3.2m. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Pan Malaysia Holdings Berhad is showing 4 warning signs in our investment analysis , and 1 of those 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.

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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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