Is PPB Group Berhad (KLSE:PPB) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, PPB Group Berhad (KLSE:PPB) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, 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 RM433.1m of debt in December 2023, down from RM1.35b, one year before. But it also has RM1.63b in cash to offset that, meaning it has RM1.20b net cash.

A Look At PPB Group Berhad's Liabilities

The latest balance sheet data shows that PPB Group Berhad had liabilities of RM955.4m due within a year, and liabilities of RM641.8m falling due after that. On the other hand, it had cash of RM1.63b and RM900.7m worth of receivables due within a year. So it can boast RM932.8m more liquid assets than total liabilities.

This short term liquidity is a sign that PPB Group Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, PPB Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

It is well worth noting that PPB Group Berhad's EBIT shot up like bamboo after rain, gaining 82% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if PPB Group Berhad can strengthen its balance sheet over time. 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. 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. During the last three years, PPB Group Berhad burned a lot of cash. 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 RM1.20b in net cash and a decent-looking balance sheet. And we liked the look of last year's 82% 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. 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.

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.