Does PPB Group Berhad (KLSE:PPB) 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.' 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 note that PPB Group Berhad (KLSE:PPB) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for PPB Group Berhad

How Much Debt Does PPB Group Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that PPB Group Berhad had RM1.32b of debt in March 2023, down from RM1.51b, one year before. However, it does have RM1.54b in cash offsetting this, leading to net cash of RM214.2m.

A Look At PPB Group Berhad's Liabilities

We can see from the most recent balance sheet that PPB Group Berhad had liabilities of RM1.83b falling due within a year, and liabilities of RM585.4m due beyond that. Offsetting these obligations, it had cash of RM1.54b as well as receivables valued at RM1.05b due within 12 months. So it actually has RM173.3m more liquid assets than total liabilities.

This state of affairs indicates that PPB Group Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the RM22.5b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that PPB Group Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Pleasingly, PPB Group Berhad is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 34,288% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine PPB Group Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While PPB Group 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 three years, PPB Group Berhad saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case PPB Group Berhad has RM214.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 34,288% year-on-year EBIT growth. So we are not troubled with PPB Group Berhad's debt use. 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. Be aware that PPB Group Berhad is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.