Does Press Metal Aluminium Holdings Berhad (KLSE:PMETAL) Have A Healthy Balance Sheet?

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 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 can see that Press Metal Aluminium Holdings Berhad (KLSE:PMETAL) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Press Metal Aluminium Holdings Berhad

What Is Press Metal Aluminium Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Press Metal Aluminium Holdings Berhad had debt of RM4.54b, up from RM3.54b in one year. On the flip side, it has RM367.6m in cash leading to net debt of about RM4.17b.

How Strong Is Press Metal Aluminium Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Press Metal Aluminium Holdings Berhad had liabilities of RM1.59b due within 12 months and liabilities of RM4.40b due beyond that. Offsetting these obligations, it had cash of RM367.6m as well as receivables valued at RM747.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM4.88b.

Given Press Metal Aluminium Holdings Berhad has a market capitalization of RM35.3b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Press Metal Aluminium Holdings Berhad's debt is 3.4 times its EBITDA, and its EBIT cover its interest expense 4.8 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Importantly Press Metal Aluminium Holdings Berhad's EBIT was essentially flat over the last twelve months. We would prefer to see some earnings growth, because that always helps diminish debt. 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 Press Metal Aluminium Holdings 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 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, Press Metal Aluminium Holdings Berhad produced sturdy free cash flow equating to 50% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Based on what we've seen Press Metal Aluminium Holdings Berhad is not finding it easy, given its net debt to EBITDA, but the other factors we considered give us cause to be optimistic. In particular, we thought its level of total liabilities was a positive. Looking at all this data makes us feel a little cautious about Press Metal Aluminium Holdings Berhad's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Press Metal Aluminium Holdings Berhad is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

If you’re looking to trade Press Metal Aluminium Holdings Berhad, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.