Is PPB Group Berhad (KLSE:PPB) Using Too Much Debt?

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 can see that PPB Group Berhad (KLSE:PPB) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for PPB Group Berhad

What Is PPB Group Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 PPB Group Berhad had debt of RM1.07b, up from RM449.8m in one year. However, its balance sheet shows it holds RM1.41b in cash, so it actually has RM341.7m net cash.

How Strong Is PPB Group Berhad's Balance Sheet?

The latest balance sheet data shows that PPB Group Berhad had liabilities of RM1.44b due within a year, and liabilities of RM482.8m falling due after that. On the other hand, it had cash of RM1.41b and RM1.15b worth of receivables due within a year. So it actually has RM637.9m 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. Succinctly put, PPB Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

In the last year PPB Group Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 7.9%, to RM4.6b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is PPB Group Berhad?

Although PPB Group Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of RM1.4b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Case in point: We've spotted 1 warning sign for PPB Group Berhad you should be aware of.

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.