Is Public Packages Holdings Berhad (KLSE:PPHB) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Public Packages Holdings Berhad

What Is Public Packages Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that Public Packages Holdings Berhad had debt of RM27.6m at the end of September 2020, a reduction from RM39.6m over a year. But it also has RM75.0m in cash to offset that, meaning it has RM47.4m net cash.

How Strong Is Public Packages Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Public Packages Holdings Berhad had liabilities of RM43.2m due within a year, and liabilities of RM17.4m falling due after that. Offsetting these obligations, it had cash of RM75.0m as well as receivables valued at RM45.0m due within 12 months. So it actually has RM59.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Public Packages Holdings Berhad's balance sheet is just as strong as racists are weak. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Public Packages Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Public Packages Holdings Berhad has seen its EBIT plunge 14% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Public Packages Holdings Berhad will need earnings to service that debt. 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 company can only pay off debt with cold hard cash, not accounting profits. While Public Packages Holdings Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Public Packages 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.

Summing up

While it is always sensible to investigate a company's debt, in this case Public Packages Holdings Berhad has RM47.4m in net cash and a decent-looking balance sheet. So we are not troubled with Public Packages Holdings Berhad's debt use. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Public Packages Holdings Berhad , and understanding them should be part of your investment process.

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. 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.
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