Does Public Packages Holdings Berhad (KLSE:PPHB) Have A Healthy Balance Sheet?

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. As with many other companies Public Packages Holdings Berhad (KLSE:PPHB) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Public Packages Holdings Berhad

What Is Public Packages Holdings Berhad's Debt?

As you can see below, Public Packages Holdings Berhad had RM15.0m of debt at September 2022, down from RM19.2m a year prior. But it also has RM107.3m in cash to offset that, meaning it has RM92.3m net cash.

A Look At Public Packages Holdings Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Public Packages Holdings Berhad had liabilities of RM27.2m due within 12 months and liabilities of RM18.7m due beyond that. Offsetting this, it had RM107.3m in cash and RM42.1m in receivables that were due within 12 months. So it actually has RM103.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that Public Packages Holdings Berhad's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Public Packages Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Public Packages Holdings Berhad grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Public Packages Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Public Packages Holdings 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 last three years, Public Packages Holdings Berhad recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Public Packages Holdings Berhad has net cash of RM92.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM22m, being 98% of its EBIT. The bottom line is that Public Packages Holdings Berhad's use of debt is absolutely fine. 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 Public Packages Holdings Berhad you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.