Here's Why PPB Group Berhad (KLSE:PPB) Can Manage Its Debt Responsibly

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. Importantly, PPB Group Berhad (KLSE:PPB) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for PPB Group Berhad

How Much Debt Does PPB Group Berhad Carry?

The image below, which you can click on for greater detail, shows that PPB Group Berhad had debt of RM506.5m at the end of March 2024, a reduction from RM1.32b over a year. But it also has RM1.71b in cash to offset that, meaning it has RM1.20b net cash.

How Strong Is PPB Group Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PPB Group Berhad had liabilities of RM962.7m due within 12 months and liabilities of RM651.0m due beyond that. Offsetting this, it had RM1.71b in cash and RM959.3m in receivables that were due within 12 months. So it actually has RM1.05b more liquid assets than total liabilities.

This surplus suggests that PPB Group Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

Shareholders should be aware that PPB Group Berhad's EBIT was down 75% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if PPB Group Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. PPB Group Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, PPB Group Berhad actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case PPB Group Berhad has RM1.20b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 146% of that EBIT to free cash flow, bringing in RM606m. So we are not troubled with PPB Group Berhad's debt use. 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. We've identified 2 warning signs with PPB Group Berhad , and understanding them should be part of your investment process.

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.