PMB Technology Berhad (KLSE:PMBTECH) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, PMB Technology Berhad (KLSE:PMBTECH) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for PMB Technology Berhad

What Is PMB Technology Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 PMB Technology Berhad had debt of RM510.4m, up from RM446.1m in one year. On the flip side, it has RM83.1m in cash leading to net debt of about RM427.4m.

A Look At PMB Technology Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that PMB Technology Berhad had liabilities of RM448.3m due within 12 months and liabilities of RM284.6m due beyond that. Offsetting these obligations, it had cash of RM83.1m as well as receivables valued at RM213.1m due within 12 months. So it has liabilities totalling RM436.7m more than its cash and near-term receivables, combined.

Given PMB Technology Berhad has a market capitalization of RM3.97b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

PMB Technology Berhad's net debt to EBITDA ratio of about 1.7 suggests only moderate use of debt. And its strong interest cover of 10.6 times, makes us even more comfortable. Notably, PMB Technology Berhad's EBIT launched higher than Elon Musk, gaining a whopping 496% on last year. There's no doubt that we learn most about debt from the balance sheet. But it is PMB Technology Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, PMB Technology 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.

Our View

PMB Technology Berhad's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we are dazzled with its EBIT growth rate. When we consider all the elements mentioned above, it seems to us that PMB Technology Berhad is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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. For instance, we've identified 3 warning signs for PMB Technology Berhad (1 doesn't sit too well with us) 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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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.