We Think PPB Group Berhad (KLSE:PPB) Can Stay On Top Of Its 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.' 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 PPB Group Berhad (KLSE:PPB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for PPB Group Berhad

How Much Debt Does PPB Group Berhad Carry?

As you can see below, at the end of March 2021, PPB Group Berhad had RM575.3m of debt, up from RM423.5m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM1.42b in cash, so it actually has RM841.7m net cash.

A Look At PPB Group Berhad's Liabilities

According to the last reported balance sheet, PPB Group Berhad had liabilities of RM1.04b due within 12 months, and liabilities of RM430.8m due beyond 12 months. Offsetting these obligations, it had cash of RM1.42b as well as receivables valued at RM937.5m due within 12 months. So it can boast RM879.3m 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. 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 88% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the most recent three years, PPB Group Berhad recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that PPB Group Berhad has net cash of RM841.7m, as well as more liquid assets than liabilities. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in -RM120m. So we don't have any problem with PPB Group Berhad's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - PPB Group Berhad has 1 warning sign we think you should be aware of.

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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